-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MShQtuc13FYEDoJQYaMVbA83VoOKvG8heHmdWFrQjQ6xqIK7sbj1NEVuVK+fle9u /O9emJXXS7IkEolU+4dR7Q== 0000898430-96-001061.txt : 19960401 0000898430-96-001061.hdr.sgml : 19960401 ACCESSION NUMBER: 0000898430-96-001061 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARCO INTERNATIONAL INC CENTRAL INDEX KEY: 0000102993 STANDARD INDUSTRIAL CLASSIFICATION: OIL & GAS FILED MACHINERY & EQUIPMENT [3533] IRS NUMBER: 950472620 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08158 FILM NUMBER: 96541036 BUSINESS ADDRESS: STREET 1: 743 N ECKHOFF ST CITY: ORANGE STATE: CA ZIP: 92668 BUSINESS PHONE: 7149781900 MAIL ADDRESS: STREET 1: 743 NO ECKHOFF STREET CITY: ORANGE STATE: CA ZIP: 92668 10-K 1 1995 ANNUAL REPORT ON FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to ---------------------- ---------------------- Commission file number 1-8158 VARCO INTERNATIONAL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-0472620 (state or other jurisdiction of incorporation (I.R.S. Employer Identification or organization) Number) 743 NORTH ECKHOFF STREET, 92668 ORANGE, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) Registrant's telephone number, including area code: (714) 978-1900 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------------ Common Stock New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive 1 proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of March 1, 1996, 30,223,796 shares of common stock were outstanding. The aggregate market value of the common stock on such date (based upon the closing price of such shares on the New York Stock Exchange) held by persons other than affiliates of registrant was approximately $230.2 million; the basis of this calculation does not constitute a determination by the registrant that such persons are affiliates, as defined in Rule 405. DOCUMENTS INCORPORATED BY REFERENCE Part II, Items 5, 6, 7 and 8 The Company's Annual Report to Shareholders for the year ended December 31, 1995. Part III, Items 10, 11, 12 and 13 The Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 16, 1996 to be filed with the Commission not later than April 29, 1996. 2 ITEM 1. BUSINESS INTRODUCTION Varco was founded in 1908 and incorporated under the laws of the State of California in 1911. Varco and its subsidiaries are engaged in the design, manufacture, sale and rental of drilling tools, equipment and integrated systems and rig instrumentation used for oil and gas drilling worldwide. The Company's principal products are drilling equipment, drilling rig instrumentation, pressure control and motion compensation equipment and solids control equipment. Drilling equipment includes integrated systems for rotating and handling the various sizes and types of pipe utilized on a drilling rig ("drilling systems") and specific purpose pipe handling tools, hoisting equipment and rotary equipment ("oil tools"). Drilling systems are manufactured and sold by the Varco Drilling Systems Division while oil tools are manufactured and sold by the Varco BJ Oil Tools Division. Drilling rig instrumentation products are manufactured, sold and rented by the Martin- Decker/TOTCO Instrumentation Division. Pressure control and motion compensation equipment are manufactured and sold by the Shaffer Division. Solids control equipment and systems are products of the Thule Rigtech Division. The following table sets forth the contribution to the Company's total revenues of its five Divisions:
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 -------- ------- ------- (IN THOUSANDS) Varco Drilling Systems $101,440 $74,405 $58,703 Varco BJ Oil Tools 41,663 41,309 40,157 Martin-Decker/TOTCO Instrumentation 58,013 54,176 44,738 Shaffer 60,925 50,900 48,169 Thule Rigtech 10,310 653
Sales of the Company's products depend on the level of construction of new drilling rigs and the replacement and upgrading of equipment for existing rigs, particularly intermediate to deep rigs (land rigs designed for drilling in excess of 8,000 feet and rigs designed for offshore drilling). The level of construction of drilling rigs and the rate at which equipment on existing rigs is replaced or upgraded depends, in substantial part, on the level of worldwide exploration and development drilling activity. Rental revenue, which is generated predominately by the Martin-Decker/TOTCO Instrumentation Division, is directly related to the level of drilling activity, particularly in the U.S. and Canada. To a lesser extent, sales and rentals of the Company's products are dependent upon the level of remedial ("workover") activity on wells previously drilled. Sales of equipment and sales and rentals of instrumentation products have also depended on the design, development and successful introduction of new products for the drilling industry. Equipment and instrumentation are also sold to existing rigs for use as spare or replacement parts. The level of worldwide drilling activity can be influenced by numerous factors, including economic and political conditions, the prices of oil and gas, development of alternative energy sources, availability of equipment and materials, availability of new onshore and offshore acreage or concessions, and new and continued governmental regulations regarding environmental protection, taxation, price controls and product allocations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." THE DRILLING PROCESS An oil or gas well is drilled by a bit attached to the end of the drill stem which is made up of 30-foot lengths of drill pipe joined by threaded connections known as "tool joints." Heavy drill collars at the bottom of the drill stem put weight on the bit. Using the conventional rotary drilling method, the drill stem is turned from the rotary table in the floor of the drilling rig by torque applied to the "kelly" (a square or hexagonal section of pipe located at the top 3 of the drill stem) by means of the master bushing and kelly bushing. During the drilling process heavy fluids ("drilling mud") are pumped down through the drill stem and forced out through the bit. The drilling mud returns to the surface through the hole area surrounding the drill stem, carrying with it the cuttings drilled out by the bit. The cuttings are removed from the mud by a filtering system and the mud is continuously recirculated back into the hole. The drilling mud also serves to contain pressure surges ("kicks") caused by natural gas that may intrude into the formation. As the hole depth increases, the kelly must be removed frequently so that additional 30-foot sections of pipe can be added to the drill stem, which may reach lengths in excess of five miles. When the bit becomes dull, the entire drill stem is pulled out of the hole and disassembled, the disconnected sections of pipe are set aside or "racked," the old bit is replaced and the drill stem reassembled and lowered back into the hole (a process called "tripping"). During drilling and tripping operations, tool joints must be screwed together and tightened ("spun in" and "made up"), and loosened and unscrewed ("broken out" and "spun out"). When the hole has reached certain depths, all of the drill pipe is pulled out of the hole and larger diameter pipe known as casing is lowered into the hole and cemented in place in order to protect against collapse and contamination of the hole. The raising and lowering of the drill stem while drilling or tripping, and the lowering of casing into the well bore, are accomplished with the rig's hoisting system. A conventional hoisting system is a block and tackle mechanism and the derrick must have sufficient structural integrity to support the entire weight of the drill stem or casing string. During the drilling process it is possible for formation fluids, such as natural gas, water or oil, to get into the wellbore creating additional pressure which, if not controlled, could lead to a "blowout" of the well. To prevent blowouts a series of high-pressure valves known as blowout preventers ("BOPs") are positioned at the top of the well and, when activated, form pressure tight seals which prevent the escape of fluids. When closed, conventional BOPs prevent normal rig operations and are activated only if drilling mud and normal well control procedures cannot safely contain the pressure. BOPs must be designed to contain pressure of up to 15,000 psi. After the well has reached its total depth and the final section of casing has been set, the drilling rig is moved off of the well and the well is prepared to begin producing oil or gas in a process known as "well completion." A producing well may undergo workover procedures to extend its life and increase its production rate. The Top Drive Drilling System, originally introduced by Varco in 1982, significantly alters the traditional drilling process. Using the Top Drive Drilling System, the drill stem is rotated from its top by means of a large electric motor. This motor is affixed to rails installed in the derrick and traverses from near the top of the derrick to the rig floor as the drill stem penetrates the earth. Therefore, the Top Drive eliminates the use of the rotary table for drilling. Components of the Top Drive also are used to connect additional lengths of pipe to the drill stem during drilling operations. VARCO DRILLING SYSTEMS The Varco Drilling Systems Division designs and manufactures integrated systems for rotating and handling the various sizes and types of pipe used on a drilling rig. They are designed to enhance the safety and productivity of the drilling rig through mechanization and automation. The Varco Top Drive Drilling System ("TDS") combines elements of pipe handling tools, as well as hoisting and rotary equipment, in a single system. Torque to turn the drill stem is imparted directly by means of a large electric motor which moves up and down along rails installed in the derrick and into which the drill stem is connected. During drilling operations, elements of the TDS perform functions such as spinning-in and making-up tool joints. It also incorporates a drill pipe elevator, providing the capability to maneuver a stand of pipe into position to be added to the drill string when drilling, or to hold and hoist the entire drill stem. Drilling with a Top Drive Drilling System provides several advantages over conventional drilling. It enables drilling with three lengths of drill pipe, reducing by two-thirds the time spent in making connections of drill pipe. In addition it facilitates "horizontal" and "extended reach" drilling (the practice of drilling wells which deviate 4 substantially from the vertical) by providing the ability to rotate the pipe as it is removed from, or replaced into, the hole, thus reducing friction and the incidence of pipe sticking. The Top Drive Drilling System also increases the safety of drilling operations. The Top Drive Drilling System has demonstrated substantial economic advantages. Users of the system generally report reductions in drilling time ranging from 20% to 40%. By facilitating extended reach drilling, the TDS increases the area which can be drilled from a given location, such as a fixed platform or man-made island. Thus, the production from a given reservoir of oil can be increased and the number of costly fixed platforms required to develop the field can be minimized. The Top Drive Drilling System has evolved continuously since its initial introduction. Today, the Top Drive product line includes several models, each designed to satisfy specific customer requirements. The version initially introduced to the market in 1982, the TDS-3, remains a part of the product line. The TDS-4, introduced in 1990, is a two-speed model which permits a variation in speed and torque that is desirable for differing drilling conditions. The TDS- 6S, first delivered in 1991, is a dual motor version which provides double the power and torque of a single motor unit. The TDS-7S, initially introduced in 1993, is powered by an alternating current ("AC") motor instead of the direct current ("DC") motor used on previous models. The AC system offers lower maintenance cost, as well as providing higher torque for longer periods and a running speed more than twice that of conventional DC motor powered systems. The Integrated Drilling System ("IDS") is an adaptation of the Top Drive concept which is more compact than its Top Drive counterparts, and which is affixed to a separately installed torque tube rather than rails permanently installed in the derrick. It can be used on rigs which are smaller and which do not have the structural integrity necessary to support a traditional Top Drive. In 1995 the TDS-9S was introduced. It is powered by dual AC motors, is reduced in length and rides on a separately installed torque tube. For these reasons it especially well suited to the conventional land rig market, where portability is critical. It is designed for ease of installation in existing derricks, can be rigged up and rigged down in a matter of hours, and is easily transported from one location to another. Eight TDS-9S units were delivered in 1995. Pipe racking systems are used to handle drill pipe, casing and other types of pipe (collectively "tubulars") on a drilling rig. Vertical pipe racking systems move drill pipe and casing between the well and a storage ("racking") area on the rig floor. Horizontal racking systems are used to handle tubulars while stored horizontally (for example, on the pipe deck of an offshore rig), transport it up to the rig floor and raise it to a vertical position from which it may be passed to a vertical racking system. Mechanical vertical pipe racking systems include those developed and sold by BJ Machinery prior to its acquisition by Varco in 1988. Such systems reduce, but do not eliminate, the manual effort involved in pipe handling. The Pipe Handling Machine, introduced by Varco in 1985, provides a fully automated mechanism for handling and racking of drill pipe and drill collars during drilling and tripping operations. It incorporates the spinning and torquing functions of the Automated Roughneck with the automatic hoisting and racking of disconnected sections of pipe. These functions are integrated via computer controlled sequencing, and the Pipe Handling Machine is operated by a person in an environmentally secure cabin. The Automated Roughneck is an automated version of the Iron Roughneck/R/, which was originally introduced by Varco in 1976. It is a microprocessor controlled device which automatically performs the torquing and spinning functions required to connect and disconnect sections of drill pipe during drilling and tripping operations, as well as during the setting of casing. The "Star" Pipe Racking System, to which the Company acquired the rights in 1990, is a semi-automated vertical pipe racking system. When used in conjunction with an Automated Roughneck, it provides an alternative to the Pipe Handling Machine. Its design makes it more easily adapted for installation on a land rig or existing offshore rig. Vertical pipe racking systems are used predominantly on offshore rigs and are virtually mandatory on 5 floating rigs such as semisubmersibles. Horizontal pipe racking systems were introduced by Varco in 1993. They include the Pipe Deck Machine ("Pipe Mite") which is used to manipulate and move tubulars while stored in a horizontal position; the Pipe Conveyor which transports sections of pipe to the rig floor; and a Pickup Laydown System ("PLS") which raises the pipe to a vertical position for transfer to a vertical racking system. These components may be employed separately, or incorporated together to form a complete horizontal racking system, known as the Pipe Transfer System ("PTS"). VARCO BJ OIL TOOLS The Varco BJ Oil Tools product line consists of a full complement of conventional rig tools and equipment. It was formed by the combination of the original Varco oil tool products and the related products acquired in the BJ Machinery Division and the Martin-Decker Division acquisitions. These products include pipe handling tools, hoisting equipment and rotary equipment. Varco's pipe handling tools are designed to enhance the safety, efficiency and reliability of pipe handling operations. Many of these tools have provided innovative methods of performing the designated task through mechanization of functions previously performed manually. Varco BJ Oil Tools manufactures various tools used in the making up and breaking out of drill pipe, including spinning wrenches, manual tongs, torque wrenches and kelly spinners. The spinning wrench is a tool used to screw together and unscrew sections of drill pipe. Powered pneumatically or hydraulically, it replaces a hazardous device known as a spinning chain. Manual tongs are used to make up or break out tool joints, while the torque wrench is a hydraulically powered device which performs this function with enhanced safety and precision. The kelly spinner is a pneumatically or hydraulically powered tool used to connect and disconnect the kelly to and from the drill stem as additional lengths of pipe are added while drilling. The Company also manufactures other tools used in various pipe handling functions. Slips are gripping devices which hold pipe or casing in suspension while in the hole, and they may be either manual or spring operated. Other products, which include safety clamps, casing bushings and casing bowls, are used to hold and guide drill pipe or casing while in the hole. When drilling, tripping or setting casing, lengths of pipe must be hoisted into position above the hole, lowered into or lifted from the hole and held in suspension while in the hole. Hoisting equipment includes devices used to grip and hold various types of pipe ("tubulars") while being raised or lowered. Drill pipe elevators are used to hold lengths of drill pipe as they are hoisted into position to be attached to the drill stem, and to hold the entire drill stem as it is lowered into or lifted from the hole. Similarly, casing elevators and spiders are gripping devices used to hold the casing as additional lengths are added and lowered into the hole. Links are elongated steel forgings from which the elevator is suspended and which, in turn, hangs from beneath the hook which is connected to the hoisting mechanism of the drilling rig. The Company manufactures elevators to accommodate a variety of tubulars, as well as a complete line of links and hooks, together with casing elevators and spiders, to handle a variety of casing sizes and accommodate casing weighing up to 1,000 tons. Varco BJ Oil Tools expanded its casing spider line in 1994 with the introduction of the Flush Mounted Spider ("FMS 375"), designed to improve safety and efficiency during casing operations. Conventional casing spiders mount above the rotary table, and result in the coupling connection height 8 feet above the rig floor. This requires scaffolding to be erected around the spider as a raised work platform for the rig crew to operate the casing tongs. The FMS 375 mounts inside the rotary table and flush with the rig floor, eliminating the need for this scaffolding. Rotary equipment products consist of kelly bushings and master bushings. The kelly bushing applies torque to the kelly to rotate the drill stem and fits in the master bushing which is turned by the rotary table on the floor of the rig. Varco produces kelly bushings and master bushings for most sizes of kellys and makes of rotary tables. 6 A substantial portion of the Company's sales in some of the Oil Tools products is attributable to sales of replacement parts which are subject to normal wear and to sales of spare parts. Replacement parts for kelly bushings, rotary slips, casing tools and spinning wrenches are a material part of the sales of those product lines. MARTIN-DECKER/TOTCO INSTRUMENTATION The Martin-Decker/TOTCO Instrumentation Division designs, manufactures and sells or rents instrumentation, primarily for use in oil and gas well drilling operations and, to a lesser extent, provides instrumentation to certain general industrial markets and for use in non-drilling related oilfield applications. A drilling rig instrumentation package is generally comprised of four elements: (1) sensors, which measure selected variables at the point of origin; (2) a mechanical or electronic means of transmitting that data to the display device; (3) a display, which may range in sophistication from a simple gauge to a computer terminal or workstation; and (4) a method for permanently recording and/or electronically transmitting the data for subsequent review and analysis. This equipment must be sufficiently rugged to withstand the hostile environmental conditions of a drilling rig. The driller relies on certain instruments to provide information critical to the operation of the drilling rig. At a minimum, this information includes the status of such basic data as weight-on-bit, rotary RPM, rotary torque, hook load, rate of penetration, mud pit volume, and mud flow. The indicators which display this data are generally contained in a common housing called a drilling console. A drilling console may range in sophistication from a collection of analog gauges to a microprocessor based system such as the Martin-Decker/TOTCO "Spectrum 1000." Computer based electronic data acquisition systems provide real-time analysis and display of the various drilling data at the driller's station, as well as other locations around the rig. In 1991 Martin-Decker/TOTCO introduced the TOTAL system, a computer-based data acquisition system incorporating up to date electronic technology with comprehensive analytical capabilities. The emphasis in TOTAL is on the analysis and interpretation of data via computer software, so that the information displayed to the driller enables him to operate the rig more safely and efficiently. In 1992 the Company licensed from the Sedco Forex Division of Schlumberger Limited the rights to develop, manufacture and market the MDS/TM/ System, an advanced computer-based drilling information and alarm system which is integrated with TOTAL. Its software programs incorporate the knowledge and experience of drilling personnel and engineers to provide critical information in a user-friendly format. In addition to MDS/TM/, a number of additional analytical capabilities have been developed for the TOTAL System. Drill-Off, a computerized drilling optimization program was jointly developed by Martin-Decker/TOTCO and Exxon. An agreement with Schlumberger's Anadril Division, authorizing MD/TOTCO to manufacture and market a sophisticated kick detection system known as Kick-Alert /SM/ was finalized in 1993. A joint effort by Martin-Decker/Totco and British Petroleum to incorporate a software program known as Early Kick Detection (EKD) on the TOTAL system was completed in 1995. An exclusive worldwide marketing agreement with Logware, Inc. to market a Windows/TM/ based drilling information system was completed in 1993. The TOTAL system is designed so that it may be scaled to the requirements of a particular drilling operation. For relatively routine drilling requirements it can represent a cost-effective means of providing basic information; however, it can be expanded to encompass the full range of analytical capability for complex and costly offshore drilling. Other drilling related products of Martin-Decker/TOTCO Instrumentation include drift indicators, which are used to measure and record the degree of drift of the well from vertical; mechanical recorders, which produce a permanent record in chart form when an electronic system is not being used; drilling control systems (auto-drillers) which automatically maintain a constant pressure on the drill bit, and drilling chokes which provide a remotely actuated method of controlling "kicks." 7 Products of the Martin-Decker/TOTCO Instrumentation Division used outside the drilling process include load and radius indicating systems for pedestal type cranes, anchor tension monitoring systems for use in mooring and positioning applications, and specialty scales for industrial use. In August 1993, the Company acquired all the outstanding shares of Metrox, Inc., a manufacturer of strain gauge systems. The acquisition of strain gauge technology provides further penetration into the industrial crane and weight monitoring markets as well as enhancing the overall Martin-Decker/TOTCO sensor technology. Strain gauges provide a more precise measurement of many variables critical to drilling operations. Drilling consoles are typically sold as original equipment to the rig manufacturer. However, electronic drilling consoles may be sold as upgrades to existing rigs. In the United States and Canada, most other instrumentation products are rented to the drilling contractor or oil company when necessary, and are therefore not permanently installed on the rig. Internationally, nearly all instrumentation equipment is sold to the rig owner and becomes a permanent part of the drilling rig. A significant portion of the sales of some instrumentation product lines is in spare and replacement parts. SHAFFER The Shaffer Division designs, manufactures, sells and distributes pressure control equipment, including ram blowout preventers, annular or spherical blowout preventers and rotating blowout preventers; blowout preventer control systems; and motion compensation systems, including riser tensioners, drillstring compensators and crown mounted compensators. Blowout preventers ("BOPs") are devices used to seal the space between the drill string and the borehole to prevent an uncontrolled flow of formation fluids and gases. Shaffer manufactures three types of BOPs. Ram and annular BOPs are back-up devices and are activated only if other techniques for controlling pressure in the well bore are inadequate. When closed, these devices prevent normal rig operations. Ram BOPs seal the wellbore by hydraulically closing rams against each other across the wellbore. Specially designed packers seal around specific sizes of pipe in the wellbore, shear pipe in the wellbore or close off an open hole. Annular BOPs seal the wellbore by hydraulically closing a rubber packing unit around the drill pipe or kelly or by sealing against itself if nothing is in the hole. The rotating BOP allows operators to drill or strip into or out of the well at low pressures without interrupting normal operations. Shaffer expanded its BOP line in 1995 with the introduction of a system for achieving Pressure Control While Drilling ("PCWD"). This new BOP allows normal drilling operations to proceed without other pressure control procedures up to 2,000 psi and will operate as a normal spherical BOP up to pressures of 5,000 psi. During 1995 Shaffer sold two PCWD units and rented two additional units. Shaffer sells BOP control systems under the registered trademark "Koomey." The Koomey/R/ control system remotely opens and closes BOPs and associated valves for both land systems and offshore systems. Shaffer sells motion compensation equipment under the registered trademark "Rucker." Motion compensation equipment stabilizes the bit on the bottom of the hole, increasing drilling effectiveness of floating offshore rigs by compensating for wave and wind action. Shaffer also manufactures tensioners which provide continuous reliable axial tension to the marine riser pipe and guide lines on floating drilling rigs, tension leg platforms and jack-up rigs. Shaffer also manufactures and sells flowline devices, primarily Best chokes, used in the production phase of the oil and gas industry. These chokes are designed for both topside-platform and subsea production, for both standard service and sulfur (H2S) service. Prior to 1993, these chokes were manufactured and sold by Varco BJ Oil Tools. Sales of spare and replacement parts, and the repair and reconditioning of used equipment constitute a significant part of Shaffer's revenue. 8 THULE RIGTECH The Thule Rigtech Division designs, sells and rents equipment for use in the mixing, handling, transport and cleaning of drilling fluid ("mud") used in the drilling process. This equipment includes shale shakers, mud cleaners, hydrocyclones, fume extraction hoods, mud chemical handling systems and automated mud system controls. Thule Rigtech products are generally subcontracted to third parties for manufacturing. In the drilling operation, mud is pumped down the drill pipe and through the holes in the drill bit. The mud acts as a lubricant to the drill bit, as a pressure equalizer and as a vehicle which carries the drilled cuttings back to the surface. Shale shakers are the principal machines used to clean the cuttings from the mud, enabling it to be reused. The VSM 100 is designed to pass large volumes of mud over fine mesh screens to extract as many of the cuttings as possible from the mud, thus avoiding the use of the other filtering processes before the mud is recirculated. Other equipment that may be employed to remove cuttings are the VSM 200 mud cleaner and de-sander and de-silter hydrocyclones. The AMS 2000 mud chemical handling system is designed to handle, store and mix mud chemicals. The mud chemicals are provided to the rig in 1-ton bags which are placed in a hopper fitted with a vibrating mechanism. A computer controlled valve in the base of the bag is used to discharge the chemical powder to the mud mixer at the desired rate. The AMS 2000 eliminates the manual handling of large sacks of powdered chemicals, improving efficiency and reducing exposure to a potentially hazardous work environment. The AMS 1000 automated mud system is a computer controlled system which oversees and controls the entire mud function. The aim of the system is to release manpower from manual operations while continuously monitoring the process to ensure that it is performing properly. Thule Rigtech equipment and systems are designed to minimize the cost of drilling through lowering mud costs and improving operational efficiency, while at the same time reducing the labor requirement and improving the safety of the drilling operation. RESEARCH AND NEW PRODUCT DEVELOPMENT Varco believes that it is a leader in the development of new technology and equipment to enhance the safety and productivity of the drilling process, and that its sales and earnings have been dependent, in part, upon the successful introduction of new or improved products. Varco's significant product developments have included the safety spinning wrench, the torque wrench, the spring slip, pneumatically operated casing elevators and spiders, the Automated Roughneck, the Top Drive Drilling System, the Pipe Handling Machine and the TOTAL system. At December 31, 1995 the Company employed 194 persons on its engineering and design staffs who were principally engaged in research and development. Total expenditures for research and development were $13.2 million in 1995, $11.4 million in 1994 and $9.5 million in 1993. As of December 31, 1995 the Company held 203 United States patents and had 7 patent applications pending. Expiration dates of such patents range from 1996 to 2012. As of such date the Company also had 250 foreign patents and 54 patent applications pending relating to inventions covered by the United States patents. The preceding include patent rights received in connection with the BJ Machinery, Martin-Decker, TOTCO and Shaffer acquisitions. There are no assurances that patents will be granted in response to pending applications. Although the Company believes that its patents and applications have value, competitive products with different designs have been successfully developed and marketed by others. The Company considers the quality and timely delivery of its products, the service it provides to its customers and the technical knowledge and skills of its personnel to be more important than its patents in its ability to compete. While the Company stresses the importance of its research and development programs, the expense and market uncertainties associated with the development and successful introduction of new products are such that there can be no assurance that the Company will realize future revenues from new products. 9 ACQUISITIONS On July 17, 1992 Varco acquired substantially all of the assets and assumed certain of the liabilities of the Shaffer Product Line ("Shaffer") of Baroid Corporation for a cash consideration of approximately $36,000,000. Shaffer designed, manufactured, and sold blowout prevention equipment and related control systems and motion compensation systems used on drilling rigs in the oil and gas industry. The Shaffer operations now comprise the Company's Shaffer Division. On August 17, 1993 the Company acquired all of the outstanding common stock of Metrox, Inc. for a cash consideration of approximately $4,000,000. Metrox designed and manufactured instrumentation used in the oil and gas industry, as well as in general commercial and industrial applications. Metrox has been combined with, and is reported within, the Company's Martin-Decker/TOTCO Instrumentation Division. On November 30, 1994 the Company acquired all of the outstanding shares of Rig Technology Limited ("Thule Rigtech"), a company incorporated in Scotland, for a cost of approximately $8,954,000. Thule Rigtech provides equipment and systems used in the handling, mixing, transport and conditioning of drilling fluids and operates as the Company's Thule Rigtech Division. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." INTERNATIONAL OPERATIONS The Company's products are sold for use in approximately 82 countries by United States customers operating in the United States and abroad, as well as by foreign customers such as privately-owned corporations and national oil companies. The Company includes as an international sale any sale where the product is designated for use other than in the United States. Revenues from products sold for use outside the United States accounted for approximately 69%, 68% and 71% of the Company's total revenues for the years ended December 31, 1995, 1994, and 1993, respectively. For further information regarding the Company's worldwide operations and international sales and rentals, see Note K of Notes to Consolidated Financial Statements. The Company's international operations are subject to the usual risks of changes in international conditions such as changes in governmental policies affecting the oil industry (e.g., environmental regulations or the nationalization of the operations of the Company's customers). Most international sales are payable in United States dollars. The Company has a policy prohibiting the payment of any bribe, kickback or similar gratuity to any person in order to facilitate the sale of the Company's products or to secure favorable action by a government official. The Company believes that this policy does not impede its competitive position in the sale of its products abroad. SALES AND DISTRIBUTION To facilitate the distribution of its drilling equipment and pressure control products, the Company maintains domestic sales and service facilities in California, Louisiana, Oklahoma, Texas and Wyoming. The rental of drilling rig instrumentation requires local availability of equipment, transportation of the equipment to the rig site and installation by qualified personnel. To service this market, the Company maintains Martin-Decker/TOTCO Instrumentation sales and service facilities in 13 states, including those mentioned above, as well as 3 locations in Canada. Internationally, the Company maintains offices in Abu Dhabi, Scotland, Moscow, Holland, Singapore and Venezuela. The Company employs independent agents in Mexico, South America, Europe, the Middle East, the Far East and Asia, the South Pacific and in parts of the United States. The Company's customers include private and government-owned oil companies, drilling contractors, drilling 10 rig manufacturers, rental tool companies, and supply companies which supply oilfield products to the end users of the Company's products. Drilling systems, such as the Automated Roughneck, Top Drive Drilling System and pipe racking systems and pressure control and motion compensation equipment, represent significant capital expenditures and are usually sold directly to an oil company, drilling contractor or rig builder. Other drilling equipment products may be sold through supply stores or directly to government-owned oil companies or drilling contractors. No customer accounted for more than 10% of annual sales during each of the years during the period 1993 through 1995. BACKLOG Sales of the Company's products are made on the basis of written purchase orders or contracts and, consistent with industry practice, by telex, letter or oral commitment later confirmed by a written order. In accordance with industry practice, orders and commitments generally can be canceled by customers at any time. In addition, orders and commitments are sometimes modified before or during manufacture of the products. The backlog of unshipped orders was approximately as follows on the dates indicated:
DECEMBER 31, --------------------------- 1995 1994 1993 ------- ------- ------- (IN THOUSANDS) Varco Drilling Systems $30,849 $36,770 $13,131 Varco BJ Oil Tools 7,147 6,558 6,666 Martin-Decker/TOTCO Instrumentation 4,535 4,581 4,416 Shaffer 31,918 3,882 8,074 Thule Rigtech 915 984 ------- ------- ------- Total $75,364 $52,775 $32,287 ======= ======= =======
Most of the backlog at December 31, 1995 is scheduled to be shipped before December 31, 1996. COMPETITION The products of the Company are sold in highly-competitive markets and its sales and earnings can be affected by competitive actions such as price changes, new product development or improved availability and delivery. The Company competes with a large number of companies, some of which are larger than the Company and have greater resources and more extensive and diversified operations. Varco's principal competitor with respect to most Drilling Systems products is Maritime Hydraulics A/S, a Norwegian company. Other competitors with respect to the Top Drive Drilling System include National-Oilwell, A/S Hydralift, another Norwegian company which acquired the rights to the product previously marketed by ACB offshore, a French company, and Tesco Corporation, a Canadian company that competes principally in the land Top Drive market against Drilling Systems' new TDS-9S. Since its introduction in 1982 and as of December 31, 1995, Varco had sold and delivered 449 Top Drive Drilling Systems, and the Company believes that its competitors had sold and delivered less than 150 systems during the same time period. 11 Varco's most significant domestic competitors with respect to oil tools include Woolley Tool and Manufacturing, a Division of Enterra Corporation, DenCon Oil Tools and Weatherford International, Inc. In foreign markets Varco experiences competition from most of its domestic competitors and from foreign companies as well. Martin-Decker/TOTCO Instrumentation competes, in the domestic rental market, with the Swaco Geolograph Division of Smith International, Inc., Petron Inc. and Adair Supply Inc. In domestic product sales, the competition consists of Wagner International Inc., Atlas Company and a number of smaller regional companies. In the international market it competes with these same companies along with such foreign competitors as Rigserv, a United Kingdom company, and Hitec A/S, a Norwegian company. Shaffer competes, in the BOP and related controls market, with Cooper Cameron Corporation and Hydril Company, a privately held company. Shaffer's principal competitor with respect to motion compensation equipment is Maritime Hydraulics A/S. Thule Rigtech competes in the solids control equipment market with Derrick Manufacturing Inc. and the Brandt Company. Although accurate industry figures are not available, the Company believes that it has a substantial share of the market for most of its equipment and instrumentation products. MANUFACTURING AND RAW MATERIALS The manufacturing processes for the Company's drilling and pressure control equipment products generally consist of machining, welding and fabrication, heat treating, assembly of manufactured and purchased components, and testing. The Company's drilling and pressure control equipment products are manufactured primarily from alloy steel, and the availability of alloy steel castings, forgings, purchased components and bar stock is critical to the production and timing of shipments. The Company believes that there are currently adequate sources of supply for alloy steel castings, forgings, purchased components and bar stock. The primary manufacturing processes associated with instrumentation and solids control products are fabrication, machining, assembly of manufactured and purchased components, and testing. The Company believes that adequate sources of supply exist for all such purchased components. Thule Rigtech products are generally subcontracted to third parties for manufacturing. The Company believes that an adequate number of subcontractors exist for the manufacture of Thule Rigtech products. EMPLOYEES At December 31, 1995 the Company had a total of 1,636 employees (of which 221 were temporary employees). Of such employees, 431 employees were engaged in sales and marketing, 194 employees were engaged in engineering and design, 127 employees were engaged in administrative or clerical capacities, and 884 were engaged in manufacturing. The Company considers its relations with its employees to be excellent and has never suffered a work stoppage or interruption due to a labor dispute. 12 MANAGEMENT EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of Varco are as follows:
NAME AGE POSITION - ----------------------------------------------------------------- Walter B. Reinhold 71 Chairman of the Board and Director George Boyadjieff 57 President, Chief Executive Officer and Director Richard A. Kertson 56 Vice President-Finance and Chief Financial Officer Donald L. Stichler 52 Controller-Treasurer and Chief Accounting Officer and Secretary Marshall Bailey 48 Vice President and Managing Director-Rig Technology Robert J. Gondek 52 Vice President and President - Martin-Decker/TOTCO Instrumentation Mark A. Merit 38 Vice President and President - Shaffer Roger D. Morgan 52 Vice President and President - Varco Drilling Systems Michael W. Sutherlin 49 Vice President and President - Varco BJ Oil Tools
Officers are elected by, and serve at the pleasure of, the Board of Directors. Mr. Reinhold has been a director of the Company since 1970. He served as Chief Executive Officer of the Company from 1970 until April 1991, and prior thereto he served as Executive Vice President. He has been employed by the Company since 1949. Mr. Reinhold is a director of Amdahl Corporation and Revco Drug Stores, Inc. Mr. Boyadjieff was elected President of the Company in May 1981 and Chief Executive Officer in April 1991. Mr. Boyadjieff served as Chief Operating Officer from June 1979 until April 1991. Prior to his election as President, he was the Senior Vice President - Operations. He has been a director of the Company since 1976 and joined the Company in 1969. Mr. Boyadjieff is a Director of Unit Instruments, Inc. Mr. Kertson was elected Vice President - Finance and Chief Financial Officer in May 1984. He had been Controller of Varco Oil Tools since January 1982. He joined the Company in October 1975, as Director of Management Information Services. Mr. Stichler was elected Controller-Treasurer in May 1984, Secretary in May 1993 and Chief Accounting Officer in May 1995. He served as Corporate Controller from December 1982 to May 1984. He served as Manager of Accounting and Taxation from 1981, when he joined the Company. Mr. Bailey was elected Vice President of the Company and Managing Director of Rig Technology in May 1995. Mr. Bailey was the Managing Director and principal shareholder of Rig Technoloby Limited. from 1988 until 1994 when it was acquired by the Company. Mr. Gondek has served as President of Martin-Decker/TOTCO Instrumentation Division since November 1990 and was elected Vice President of the Company in April 1991. From September 1986 until November 1990 Mr. Gondek was the Vice President and General Manager of the TOTCO operations of Baker Hughes Incorporated. Prior to 1986 he held various positions with TOTCO International Corporation including Vice President of Engineering, Vice President of Manufacturing and Senior Vice President. Mr. Merit was elected Vice President of the Company and President of Shaffer in October 1992. He had been Vice President-Manufacturing of Varco Drilling Systems since August 1991. Previously he was Operations Manager of Varco U.K. Limited from March 1990, and prior to that he was Manager of Engineering Software 13 Development for Varco Drilling Systems since 1985. He has been employed by the Company in various capacities since 1980. Mr. Morgan was elected Vice President of the Company in May 1984 and President of Varco Drilling Systems in May 1990. He had been Vice President-Materials and Manufacturing of Varco Oil Tools since May 1981. Previously, he was Vice President-Materials and Production of Varco Oil Tools. He has been employed by the Company in various capacities since 1974. Mr. Sutherlin was elected Vice President of the Company in May 1984 and President-Varco BJ Oil Tools in July 1988. Previously he served as Vice President-Best Operations. He has been employed by the Company in various capacities since 1975. ITEM 2. PROPERTIES The Company's principal manufacturing facilities are located in Orange, California (the "Orange Facility"), Etten-Leur, The Netherlands (the "Etten- Leur Facility"), Cedar Park, Texas (the "Cedar Park Facility") and Houston, Texas (the "Shaffer Facility"). The Orange Facility and the Etten-Leur Facility are used primarily for manufacturing the Company's drilling equipment; the Cedar Park Facility manufactures primarily instrumentation products; and the Shaffer Facility is used for manufacturing pressure control, motion compensation and drilling equipment and flow line devices. Thule Rigtech products are generally subcontracted to third parties for manufacturing. The Orange Facility occupies approximately nine acres in Orange County, California which are leased under a long-term lease. The Orange Facility includes three manufacturing/warehouse buildings comprising a total of approximately 135,000 square feet and a four-story high-rise facility with automatic storage and retrieval capabilities. The Orange Facility is currently leased from certain officers, shareholders, and directors of the Company and affiliated trusts. This facility is the primary manufacturing location for the Varco Drilling Systems Division, and the Company estimates that based upon direct labor hours and a two shift operation, utilization of this facility was approximately 95% of capacity in 1995 as compared to 70% and 45% of capacity in 1994 and 1993 respectively. The Etten-Leur Facility consists of approximately 73,000 square feet of manufacturing and warehousing space and approximately 12,900 square feet of office space on approximately six acres of land. This facility is the primary manufacturing location for the Varco BJ Oil Tools Division, and the Company estimates that based upon direct labor hours and a two shift operation, utilization of this facility was approximately 80% of capacity in 1995 as compared to 75% of capacity in 1994 and 50% of capacity in 1993. The Martin-Decker/TOTCO Instrumentation products are manufactured at the Cedar Park Facility. The Company leased this facility from Cooper Industries, Inc. until 1995 when the Company purchased this facility for aproximately $3.6 million. The Cedar Park Facility consists of approximately 200,000 square feet of manufacturing and warehousing space and approximately 33,000 square feet of office space located on approximately 40 acres. The Company estimates that based upon direct labor hours and a two shift operation, utilization of this facility was approximately 95% of capacity during 1995 and 1994 as compared to 70% of capacity during 1993. The Shaffer Division's products are manufactured at the Shaffer Facility, which consists of approximately 270,000 square feet of manufacturing and warehousing space and approximately 73,000 square feet of office space located on approximately 34 acres. In addition, certain products of the Varco BJ Oil Tools Division are manufactured at this facility. The Shaffer facility has been operated by the Company since the acquisition of Shaffer on July 17, 1992. The Company estimates that based upon direct labor hours and a two shift operation, utilization of this facility for 1995 was approximately 80% as compared to 70% in 1994 and 65% in 1993. An additional manufacturing facility located in Houston (the "Houston BJ Facility") was closed during the fourth quarter of 1992 and activities previously performed at that plant have been moved to other Company locations, principally the Shaffer Facility. The Houston BJ Facility, which consists of approximately 135,000 square feet of manufacturing and office space, and the 32.2 acres of land on which it is located are owned by the Company. This facility has been listed for sale. 14 The Drilling Systems Division's administration and the Company's executive offices are located in Orange, California adjacent to the Orange Facility. They comprise approximately 36,000 square feet of office space and are leased from certain officers, shareholders and directors of the Company and affiliated trusts. The Company owns sales and service facilities in Oklahoma, Wyoming, Scotland and Singapore and leases approximately four such facilities throughout the United States in addition to facilities in Canada, Mexico and Venezuela. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which Varco or any of its subsidiaries is a party or to which any of their property is subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of 1995. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information concerning the market for the Registrant's Common Stock and related stockholder matters contained under the captions "Price Range of Varco Common Stock," "Dividend Policy" and "Common Stock" on page 42 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1995, is hereby incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA The selected financial information set forth under the caption "Five Year Financial and Operating Highlights" on page 20 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1995, is hereby incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 22 through 26 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1995, is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is hereby incorporated by reference to pages 27 through 40 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1995. The Report of Independent Auditors is included in Item 14(d). 15 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is hereby incorporated by reference to the information set forth under the sub caption "Nominees" under the caption "ELECTION OF DIRECTORS" in the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on May 16, 1996, except that information concerning the Executive Officers of the Registrant is contained in Item 1 under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION The information required by this item is hereby incorporated by reference to the information set forth under the sub captions "Compensation and Stock Option Information" and "Compensation Committee Interlocks and Insider Participation" under the caption "EXECUTIVE COMPENSATION" and under the subcaption "Director Compensation" under the caption "ELECTION OF DIRECTORS" in the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on May 16, 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is hereby incorporated by reference to the information set forth under the caption "BENEFICIAL OWNERSHIP OF VARCO SECURITIES" in the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on May 16, 1996. 16 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is hereby incorporated by reference to the information set forth under the caption "CERTAIN TRANSACTIONS AND RELATIONSHIPS" in the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on May 16, 1996. 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS AND SCHEDULES The following consolidated financial statements of Varco International, Inc. and subsidiaries, included in the Registrant's Annual Report to Shareholders for the year ended December 31, 1995, are incorporated by reference in Item 8:
PAGE IN ANNUAL REPORT ------- Consolidated Balance Sheets-as of December 31, 1995 and 1994..................................... 27 Consolidated Statements of Income-Years ended December 31, 1995, 1994 and 1993................... 28 Consolidated Statements of Shareholders' Equity-Years ended December 31, 1995, 1994 and 1993..... 29 Consolidated Statements of Cash Flows-Years ended December 31, 1995, 1994 and 1993............... 30 Notes to Consolidated Financial Statements....................................................... 31
The Report of Independent Auditors and the following consolidated financial statement schedule of Varco International, Inc., and subsidiaries are included in Item 14(d):
PAGE ---- Report of Independent Auditors.......................................... 22 Schedule II - Valuation and Qualifying Accounts......................... 23
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. Individual financial statements of the registrant have been omitted as the registrant is primarily an operating company and all subsidiaries included in the consolidated financial statements filed, in the aggregate, do not have minority equity interest and/or indebtedness to any person other than the registrant or its consolidated subsidiaries in amounts which together (excepting indebtedness incurred in the ordinary course of business which is not overdue and matures within one year from the date of its creation, whether or not evidenced by securities, and indebtedness of subsidiaries which is collateralized by the registrant by guarantee, pledge, assignment or otherwise) exceed 5 percent of the total assets as shown by the most recent year-end consolidated balance sheet. (b) REPORTS ON FORM 8-K Varco filed no reports on Form 8-K during the three months ended December 31, 1995. 18 (c) EXHIBITS Exhibits marked with an asterisk are filed herewith. The remainder of the exhibits have heretofore been filed with the Commission and are incorporated herein by reference. Each management contract or compensation plan or arrangement filed as an exhibit hereto is identified by a dagger. *3.1 Amended and Restated Articles of Incorporation of Varco. 3.2 Bylaws of Varco, incorporated by reference to Exhibit 3.7 to Amendment No. 1 to Varco's Registration Statement on Form S-1, Registration No. 33-40191. 4.1 Note Agreement, dated as of July 1, 1992 between Varco International, Inc. and the Purchasers named in Schedule 1 thereto, incorporated by reference to Exhibit 4.0 to Varco's Quarterly report on Form 10-Q for the quarter ended September 30, 1992. 4.2 First Amendment to Note Agreement, dated as of November 12, 1992, to Note Agreement included as Exhibit 4.1 hereto, incorporated by reference to Exhibit 4.3 to Varco's annual report on Form 10-K for the year ended December 31, 1992. 4.3 Waiver and Second Amendment to Note Agreement, dated as of February 25, 1993, to Note Agreement included as Exhibit 4.1 hereto, incorporated by reference to Exhibit 4.4 to Varco's annual report on Form 10-K for the year ended December 31, 1992. 4.4 Waiver, dated as of March 8, 1995, to Note Agreement included as Exhibit 4.1 hereto incorporated by reference to Exhibit 4.4 to Varco's annual report on Form 10-K for the year ended December 31, 1994. *4.5 Waiver and Third Amendment to Note Agreement, dated as of March 8, 1995, to Note Agreement included as Exhibit 4.1 hereto. 4.6 Credit Agreement, dated as of February 25, 1993 among Varco International, Inc., Citicorp USA, Inc. and Citibank, N.A., incorporated by reference to Exhibit 4.5 to Varco's annual report on Form 10-K for the year ended December 31, 1992. 4.7 First Amendment dated as of August 3, 1993 to Credit Agreement included as Exhibit 4.6 hereto, incorporated by reference to Exhibit 4 to Varco's quarterly report on Form 10-Q for the quarter ended September 30, 1993. 4.8 Second Amendment dated as of September 23, 1993 to Credit Agreement included as Exhibit 4.6 hereto, incorporated by reference to Exhibit 4.6 to Varco's annual report on Form 10-K for the year ended December 31, 1993. 4.9 Third Amendment dated as of December 1, 1993 to Credit Agreement included as Exhibit 4.6 hereto, incorporated by reference to Exhibit 4.7 to Varco's annual report on Form 10-K for the year ended December 31, 1993. 4.10 Fourth Amendment dated as of May 12, 1994 to Credit Agreement included as Exhibit 4.6 hereto, incorporated by reference to Exhibit 4 to Varco's quarterly report on Form 10-Q for the quarter ended September 30, 1994. 4.11 Fifth Amendment dated as of October 31, 1994 to Credit Agreement included as Exhibit 4.6 hereto, incorporated by reference to Exhibit 4.10 to Varco's annual report on Form 10-K for the year ended December 31, 1994. 19 *4.12 Sixth Amendment dated as of March 17, 1995 to Credit Agreement included as Exhibit 4.6 hereto. *4.13 Seventh Amendment dated as of December 31, 1995 to Credit Agreement included as Exhibit 4.6 hereto. 10.1+ Varco International, Inc. Non-Qualified Stock Option Plan, as amended, incorporated by reference to Exhibit 14.4 to Post-Effective Amendment No. 4 to Varco's Registration Statement on Form S-8, Registration No. 2- 66830. 10.2+ The Varco 1980 Stock Option Plan, as amended, incorporated by reference to Exhibit 4.5 to Post-Effective Amendment No. 4 to Varco's Registration Statement on Form S-8, Registration No. 2-66830. 10.3+ Amendment to Varco 1980 Stock Option Plan, incorporated by reference to Exhibit 10.2 to Varco's quarterly report on Form 10-Q for the quarter ended September 30, 1984. 10.4+ The Varco 1982 Non-Employee Director Stock Option Plan, incorporated by reference to Exhibit 19.3 to Varco's quarterly report on Form 10-Q for the quarter ended June 30, 1982. 10.5+ Varco International, Inc. Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10.6 to Varco's annual report on Form 10-K for the year ended December 31, 1992. 10.6+ Varco International, Inc. Stock Bonus Plan, incorporated by reference to Exhibit 10.8 to Varco's annual report on Form 10-K for the year ended December 31, 1985. *10.7+ Amendment to Varco International, Inc. Stock Bonus Plan included as Exhibit 10.6 hereto. 10.8 Lease dated March 7, 1975, as amended, incorporated by reference to Exhibit 10.7 to Varco's annual report on Form 10-K for the year ended December 31, 1981, and agreement with respect thereto dated as of January 1, 1982, incorporated by reference to Exhibit 10.8 to Varco's annual report on Form 10-K for the year ended December 31, 1982. 10.9 Agreement dated as of January 1, 1984, with respect to Lease included as Exhibit 10.8 hereto, incorporated by reference to Exhibit 10.13 to Varco's annual report on Form 10-K for the year ended December 31, 1984. 10.10 Agreement dated as of February 8, 1985, with respect to Lease included as Exhibit 10.8 hereto, incorporated by reference to Exhibit 10.14 to Varco's annual report on Form 10-K for the year ended December 31, 1984. 10.11 Agreement dated as of April 12, 1985 to Lease included as Exhibit 10.8 hereto., incorporated by reference to Exhibit 10.2 to Varco's Quarterly Report on Form 10-Q for the quarter ended June 30, 1985. *10.12 Amendment dated as of January 11, 1995 to Lease included as Exhibit 10.8 hereto. 10.13 Agreement dated as of June 11, 1981, among W.B. Reinhold, B. Reinhold, Jr., Charlotte 20 Reinhold Lorenz, Baldwin Terry Reinhold and Leo J. Pircher, incorporated by reference to Exhibit 10.14 to Amendment No. 2 to Varco's Registration Statement on Form S-1, Registration No. 33-9341. 10.14 Standard Industrial Lease-Net dated September 29, 1988 for the premises at 743 N. Eckhoff, Orange, California, incorporated by reference to Exhibit 10.14 to Varco's annual report on Form 10-K for the year ended December 31, 1988. *10.15 First amendment dated as of January 11, 1995 to Lease included as Exhibit 10.14 hereto. 10.16 Asset Purchase Agreement between Varco International, Inc. and Baker Hughes Incorporated dated as of August 10, 1988, incorporated by reference to Exhibit 2.0 to Varco's Form 8-K dated September 29, 1988. 10.17+ The Varco International Inc. 1990 Stock Option Plan, incorporated by reference to Exhibit 10.0 to Varco's Form 10-Q for the quarter ended March 31, 1990. 10.18+ Varco 1980 Employee Stock Purchase Plan, as amended, incorporated by reference to Exhibit 28 to Varco's Registration Statement on Form S-8, Registration No. 33-36841. *10.19+ Amendment to the Varco 1980 Employee Stock Purchase Plan included as Exhibit 10.18 hereto. 10.20 Amended and Restated Asset Purchase Agreement, dated as of August 1, 1990 by and between Varco and Baker Hughes Incorporated, incorporated by reference to Exhibit 2 to Varco's quarterly report on Form 10-Q for the quarter ended June 30, 1990. 10.21+ Varco International Inc. Management Incentive Bonus Plan incorporated by reference to Exhibit 10.22 to Varco's annual report on Form 10-K for the year ended December 31, 1990. 10.22 Asset Purchase Agreement, dated as of April 10, 1992, by and between Varco International, Inc. and Baroid Corporation, incorporated by reference to Exhibit 2 to Varco's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992. 10.23 Amendments dated May 28, 1992, June 30, 1992, July 15, 1992 and two amendments dated July 16, 1992 to Asset Purchase Agreement included as Exhibit 10.22 hereto, incorporated by reference to Exhibit 2.1 to Varco's Current Report on Form 8-K dated July 17, 1992. *10.24+ The Varco International Inc. 1994 Directors' Stock Option Plan. 10.25+ The Varco International, Inc. Director Savings Plan incorporated by reference to Exhibit 10.23 to Varco's annual report on Form 10-K for the year ended December 31, 1994. 10.26+ The Varco International, Inc. Executive Management Savings Plan incorporated by reference to Exhibit 10.24 to Varco's annual report on Form 10-K for the year ended December 31, 1994. *11 Statement re computation of per share earnings. *12 Statement re computation of ratios. 21 *13 1995 Annual Report to Shareholders, to the extent expressly incorporated by reference in this Report on Form 10-K. Such Annual Report, except for those portions so incorporated by reference, is furnished only for information and is not to be deemed filed herewith . *21 Subsidiaries of Varco. *23 Consent of Independent Auditors. *27 Financial Data Schedule *Filed herewith +Management contract, compensation plan or arrangement. As to any security holder of the Registrant requesting a copy of this Form 10- K, the Registrant will furnish copies of any exhibits listed above as filed with this Form 10-K upon payment to it of its reasonable expenses in furnishing such exhibits. (d) SCHEDULES The Report of Independent Auditors and the schedule listed in the Index to Financial Statements and Schedules (Item 14(a)) are filed as part of this Annual Report on Form 10-K. REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors Varco International, Inc. We have audited the consolidated balance sheets of Varco International, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Varco International, Inc. and subsidiaries at December 31, 1995 and 1994, and the consolidated results of operations and cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Orange County, California February 15, 1996 22 VARCO INTERNATIONAL, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column D --------------------- ---------------------------------------------------------------------- Additions ------------------------- Charged to Balance at Charged to other Balance beginning costs and accounts- Deductions- at end of Description of period expenses describe describe period - ------------------------------------------------------------------------------------------------------------------------------- (in thousands) Year ended December 31, 1995: Deducted from asset accounts: Allowance for doubtful accounts.............. $ 1,580 $ 223 $ 14 $ 232(1) $ 1,585 Allowance for excess and obsolete inventory.. 41,912 789 440(3) 4,072(2) 39,069 Reserve for assets held for sale............. 4,553 239 (42) 4,750 -------------------------------------------------------------------------- TOTALS................................ $48,045 $1,251 $ 412 $4,304 $ 45,404 ========================================================================== Year ended December 31, 1994: Deducted from asset accounts: Allowance for doubtful accounts.............. $ 1,743 $ 34 $ 105 $ 302(1) $ 1,580 Allowance for excess and obsolete inventory.. 45,133 253 133 3,607(2) 41,912 Reserve for assets held for sale............. 4,207 341 5 4,553 --------------------------------------------------------------------------
23 TOTALS.................................. $51,083 $ 628 $ 243 $3,909 $ 48,045 ========================================================================= Year ended December 31, 1993: Deducted from asset accounts: Allowance for doubtful accounts.............. $ 1,703 $ 292 252(1) $ 1,743 Allowance for excess and obsolete inventory.. 47,846 1,476 4,189(2) 45,133 Reserve for assets held for sale............. 4,183 345 321 4,207 -------------------------------------------------------------------------- TOTALS $53,732 $2,113 $4,762 $51,083 ==========================================================================
(1) Uncollectible accounts written off, net of recoveries. (2) Obsolete inventories written off. (3) Slow moving inventories sold. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VARCO INTERNATIONAL, INC. By GEORGE I. BOYADJIEFF ------------------------------------- George I. Boyadjieff President and Chief Executive Officer and Director Dated March 28, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Principal Executive Officer and Director: GEORGE I. BOYADJIEFF President and Chief March 28, 1996 - ---------------------------------- Executive Officer George I. Boyadjieff Principal Financial Officer: RICHARD A. KERTSON Vice President- March 28, 1996 - ---------------------------------- Finance Richard A. Kertson Principal Accounting Officer: Controller-Treasurer DONALD L. STICHLER and Chief Accounting March 28, 1996 - ---------------------------------- Officer and Secretary Donald L. Stichler Other Directors: WALTER B. REINHOLD Director-Chairman March 28, 1996 - ---------------------------------- Walter B. Reinhold TALTON R. EMBRY Director March 28, 1996 - ---------------------------------- Talton R. Embry Director March , 1996 - ---------------------------------- Andre R. Horn MAURICE E. JACQUES Director March 28, 1996 - ---------------------------------- Maurice E. Jacques
25 JACK W. KNOWLTON Director March 28, 1996 - ---------------------------------- Jack W. Knowlton LEO J. PIRCHER Director March 28, 1996 - ---------------------------------- Leo J. Pircher CARROLL W. SUGGS Director March 28, 1996 - ---------------------------------- Carroll W. Suggs ROBERT A. TEITSWORTH Director March 28, 1996 - ---------------------------------- Robert A. Teitsworth EUGENE R. WHITE Director March 28, 1996 - ---------------------------------- Eugene R. White JAMES D. WOODS Director March 28, 1996 - ---------------------------------- James D. Woods
26 (c) EXHIBITS *3.1 Amended and Restated Articles of Incorporation of Varco. 3.2 Bylaws of Varco, incorporated by reference to Exhibit 3.7 to Amendment No. 1 to Varco's Registration Statement on Form S-1, Registration No. 33-40191. 4.1 Note Agreement, dated as of July 1, 1992 between Varco International, Inc. and the Purchasers named in Schedule 1 thereto, incorporated by reference to Exhibit 4.0 to Varco's Quarterly report on Form 10-Q for the quarter ended September 30, 1992. 4.2 First Amendment to Note Agreement, dated as of November 12, 1992, to Note Agreement included as Exhibit 4.1 hereto, incorporated by reference to Exhibit 4.3 to Varco's annual report on Form 10-K for the year ended December 31, 1992. 4.3 Waiver and Second Amendment to Note Agreement, dated as of February 25, 1993, to Note Agreement included as Exhibit 4.1 hereto, incorporated by reference to Exhibit 4.4 to Varco's annual report on Form 10-K for the year ended December 31, 1992. 4.4 Waiver, dated as of March 8, 1995, to Note Agreement included as Exhibit 4.1 hereto incorporated by reference to Exhibit 4.4 to Varco's annual report on Form 10-K for the year ended December 31, 1994. *4.5 Waiver and Third Amendment to Note Agreement, dated as of March 8, 1995, to Note Agreement included as Exhibit 4.1 hereto. 4.6 Credit Agreement, dated as of February 25, 1993 among Varco International, Inc., Citicorp USA, Inc. and Citibank, N.A., incorporated by reference to Exhibit 4.5 to Varco's annual report on Form 10-K for the year ended December 31, 1992. 4.7 First Amendment dated as of August 3, 1993 to Credit Agreement included as Exhibit 4.6 hereto, incorporated by reference to Exhibit 4 to Varco's quarterly report on Form 10-Q for the quarter ended September 30, 1993. 4.8 Second Amendment dated as of September 23, 1993 to Credit Agreement included as Exhibit 4.6 hereto, incorporated by reference to Exhibit 4.6 to Varco's annual report on Form 10-K for the year ended December 31, 1993. 4.9 Third Amendment dated as of December 1, 1993 to Credit Agreement included as Exhibit 4.6 hereto, incorporated by reference to Exhibit 4.7 to Varco's annual report on Form 10-K for the year ended December 31, 1993. 4.10 Fourth Amendment dated as of May 12, 1994 to Credit Agreement included as Exhibit 4.6 hereto, incorporated by reference to Exhibit 4 to Varco's quarterly report on Form 10-Q for the quarter ended September 30, 1994. 4.11 Fifth Amendment dated as of October 31, 1994 to Credit Agreement included as Exhibit 4.6 hereto, incorporated by reference to Exhibit 4.10 to Varco's annual report on Form 10-K for the year ended December 31, 1994. *4.12 Sixth Amendment dated as of March 17, 1995 to Credit Agreement included as Exhibit 4.6 hereto. *4.13 Seventh Amendment dated as of December 31, 1995 to Credit Agreement included as Exhibit 4.6 hereto. 10.1+ Varco International, Inc. Non-Qualified Stock Option Plan, as amended, incorporated by reference to Exhibit 14.4 to Post-Effective Amendment No. 4 to Varco's Registration Statement on Form S-8, Registration No. 2- 66830. 10.2+ The Varco 1980 Stock Option Plan, as amended, incorporated by reference to Exhibit 4.5 to Post-Effective Amendment No. 4 to Varco's Registration Statement on Form S-8, Registration No. 2-66830. 10.3+ Amendment to Varco 1980 Stock Option Plan, incorporated by reference to Exhibit 10.2 to Varco's quarterly report on Form 10-Q for the quarter ended September 30, 1984. 10.4+ The Varco 1982 Non-Employee Director Stock Option Plan, incorporated by reference to Exhibit 19.3 to Varco's quarterly report on Form 10-Q for the quarter ended June 30, 1982. 10.5+ Varco International, Inc. Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10.6 to Varco's annual report on Form 10-K for the year ended December 31, 1992. 10.6+ Varco International, Inc. Stock Bonus Plan, incorporated by reference to Exhibit 10.8 to Varco's annual report on Form 10-K for the year ended December 31, 1985. *10.7+ Amendment to Varco International, Inc. Stock Bonus Plan included as Exhibit 10.6 hereto. 10.8 Lease dated March 7, 1975, as amended, incorporated by reference to Exhibit 10.7 to Varco's annual report on Form 10-K for the year ended December 31, 1981, and agreement with respect thereto dated as of January 1, 1982, incorporated by reference to Exhibit 10.8 to Varco's annual report on Form 10-K for the year ended December 31, 1982. 10.9 Agreement dated as of January 1, 1984, with respect to Lease included as Exhibit 10.8 hereto, incorporated by reference to Exhibit 10.13 to Varco's annual report on Form 10-K for the year ended December 31, 1984. 10.10 Agreement dated as of February 8, 1985, with respect to Lease included as Exhibit 10.8 hereto, incorporated by reference to Exhibit 10.14 to Varco's annual report on Form 10-K for the year ended December 31, 1984. 10.11 Agreement dated as of April 12, 1985 to Lease included as Exhibit 10.8 hereto., incorporated by reference to Exhibit 10.2 to Varco's Quarterly Report on Form 10-Q for the quarter ended June 30, 1985. *10.12 Amendment dated as of January 11, 1995 to Lease included as Exhibit 10.8 hereto. 10.13 Agreement dated as of June 11, 1981, among W.B. Reinhold, B. Reinhold, Jr., Charlotte Reinhold Lorenz, Baldwin Terry Reinhold and Leo J. Pircher, incorporated by reference to Exhibit 10.14 to Amendment No. 2 to Varco's Registration Statement on Form S-1, Registration No. 33-9341. 10.14 Standard Industrial Lease-Net dated September 29, 1988 for the premises at 743 N. Eckhoff, Orange, California, incorporated by reference to Exhibit 10.14 to Varco's annual report on Form 10-K for the year ended December 31, 1988. *10.15 First amendment dated as of January 11, 1995 to Lease included as Exhibit 10.14 hereto. 10.16 Asset Purchase Agreement between Varco International, Inc. and Baker Hughes Incorporated dated as of August 10, 1988, incorporated by reference to Exhibit 2.0 to Varco's Form 8-K dated September 29, 1988. 10.17+ The Varco International Inc. 1990 Stock Option Plan, incorporated by reference to Exhibit 10.0 to Varco's Form 10-Q for the quarter ended March 31, 1990. 10.18+ Varco 1980 Employee Stock Purchase Plan, as amended, incorporated by reference to Exhibit 28 to Varco's Registration Statement on Form S-8, Registration No. 33-36841. *10.19+ Amendment to the Varco 1980 Employee Stock Purchase Plan included as Exhibit 10.18 hereto. 10.20 Amended and Restated Asset Purchase Agreement, dated as of August 1, 1990 by and between Varco and Baker Hughes Incorporated, incorporated by reference to Exhibit 2 to Varco's quarterly report on Form 10-Q for the quarter ended June 30, 1990. 10.21+ Varco International Inc. Management Incentive Bonus Plan incorporated by reference to Exhibit 10.22 to Varco's annual report on Form 10-K for the year ended December 31, 1990. 10.22 Asset Purchase Agreement, dated as of April 10, 1992, by and between Varco International, Inc. and Baroid Corporation, incorporated by reference to Exhibit 2 to Varco's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992. 10.23 Amendments dated May 28, 1992, June 30, 1992, July 15, 1992 and two amendments dated July 16, 1992 to Asset Purchase Agreement included as Exhibit 10.22 hereto, incorporated by reference to Exhibit 2.1 to Varco's Current Report on Form 8-K dated July 17, 1992. *10.24+ The Varco International Inc. 1994 Directors' Stock Option Plan. 10.25+ The Varco International, Inc. Director Savings Plan incorporated by reference to Exhibit 10.23 to Varco's annual report on Form 10-K for the year ended December 31, 1994. 10.26+ The Varco International, Inc. Executive Management Savings Plan incorporated by reference to Exhibit 10.24 to Varco's annual report on Form 10-K for the year ended December 31, 1994. *11 Statement re computation of per share earnings. *12 Statement re computation of ratios. *13 1995 Annual Report to Shareholders, to the extent expressly incorporated by reference in this Report on Form 10-K. Such Annual Report, except for those portions so incorporated by reference, is furnished only for information and is not to be deemed filed herewith . *21 Subsidiaries of Varco. *23 Consent of Independent Auditors. *27 Financial Data Schedule *Filed herewith +Management contract, compensation plan or arrangement. EX-3.1 2 AMENDED AND RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF VARCO INTERNATIONAL, INC. Richard A. Kertson and Donald L. Stichler certify that: 1. They are the duly elected and acting Vice President-Finance and Secretary, respectively, of Varco International, Inc., a California corporation (the "Company"). 2. The Articles of Incorporation of the Company are amended and restated to read in full as follows: Name One: The name of the corporation is: Varco International, Inc. Purpose Two: The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated under the California Corporations Code. Authorized Shares Three: This corporation is authorized to issue two classes of shares designated respectively "Common Stock" and "Preferred Stock," referred to herein as Common Stock or Common Shares and Preferred Stock or Preferred Shares, respectively. The number of shares of Common Stock is eighty million (80,000,000) and the number of shares of Preferred Stock is ten million (10,000,000). The Preferred Shares may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares of any series of Preferred Shares and to determine the designation of any such series. The Board of Directors is also authorized to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Preferred Shares and, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. Election Four: The corporation elects to be governed by all of the provisions of Division 1 of Title 1 of the California Corporations Code (as amended by act of the California Legislature, 1975-1976 regular session, effective January 1, 1977, as defined in Section 2300 of the California General Corporation Law) and not otherwise applicable to the corporation under Chapter 23 of said Division 1. Five: (a) Limitation of Directors' Liability. The liability of the ---------------------------------- directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. (b) Indemnification of Corporate Agents. This corporation is ----------------------------------- authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) by bylaw provisions, agreements with agents, vote of shareholders or disinterested directors, or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to this corporation and its stockholders. (c) Repeal or Modification. Any repeal or modification of the ---------------------- foregoing provisions of this Article Five by the shareholders of this corporation shall not adversely affect any right or protection of an agent of this corporation existing at the time of such repeal or modification. 3. The amendment and restatement set forth herein have been duly approved by the Board of Directors of the Company. 4. The Certificate of Determination for the series of Preferred Stock designated as "$2.00 Cumulative Convertible Preferred Stock, Series A" (the "Series A Preferred Stock") provides that upon the acquisition thereof by the Company, shares of Series A Preferred Stock shall be returned to the status of authorized but unissued shares of Preferred Stock and, accordingly, shares so acquired may not be reissued as shares of Series A Preferred Stock. All of the authorized shares of the Series A Preferred Stock have been acquired by the Company. Accordingly, all statements of the rights, preferences, privileges, and restrictions relating solely to the Series A Preferred Stock have been eliminated from the Articles of Incorporation in the foregoing amendment and restatement. The foregoing is the only amendment to the Articles of Incorporation effected by the amendment and restatement set forth herein. The foregoing amendment is one which may be adopted with approval of the Board of Directors alone pursuant to the provisions of Section 510(b) of the California Corporations Code. IN WITNESS WHEREOF, the undersigned have executed this Certificate on May 18, 1995. /s/ RICHARD A. KERTSON ---------------------------- Richard A. Kertson Vice President-Finance /s/ DONALD L. STICHLER ---------------------------- Donald L. Stichler Secretary The undersigned, Richard A. Kertson and Donald L. Stichler, the Vice President-Finance and Secretary, respectively, of Varco International, Inc., each declares under penalty of perjury that the matters set forth in the foregoing Certificate are true of his own knowledge. Executed at Orange, California on May 18, 1995. /s/ RICHARD A. KERTSON ---------------------------- Richard A. Kertson Vice President-Finance /s/ DONALD L. STICHLER ---------------------------- Donald L. Stichler Secretary EX-4.5 3 WAIVER AND THIRD AMENDMENT TO NOTE AGREEMENT EXHIBIT 4.5 VARCO INTERNATIONAL, INC. WAIVER AND THIRD AMENDMENT TO NOTE AGREEMENT DATED AS OF MARCH 8, 1995 To Each of the Institutions Named in the Attached Schedule I (the "Holders") Ladies and Gentlemen: Reference is made to the Note Agreement dated as of July 1, 1992 (as heretofore amended, modified or supplemented by amendment or waiver, the "Note Agreement") between Varco International, Inc., a California corporation (the "Company"), and each of the Purchasers named in Schedule 1 thereto pursuant to which the Company issued $50,000,000 aggregate principal amount of its 8.95% Senior Notes due June 30, 1999 (the "Notes"). This Waiver and Third Amendment to Note Agreement is hereinafter referred to as this "Waiver." Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to such terms in the Note Agreement. The Company intends to repurchase shares of its outstanding Common Stock for a purchase price of approximately $40,000,000 in a self-tender offer. It is likely that the Company would use a "Dutch Auction" type tender offer in which the number of shares is specified and the purchase price per share is expressed as a range. Whether the self-tender is a "Dutch Auction" type or a tender for a fixed number of shares at a fixed price, the maximum aggregate purchase price for all shares purchased will not exceed $45,000,000. The self-tender described in this paragraph is hereinafter referred to as the "Self-Tender." The Company has requested an amendment of Sections 7.1, 7.3 and 7.4(d) of the Note Agreement and certain waivers to avoid violating Section 7.8 of the Note Agreement, and the Holders are willing to agree to such amendments and grant such waivers on the terms and conditions hereinafter set forth. In consideration of the premises and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and the Holders agree as follows: (S)1 AMENDMENT OF THE NOTE AGREEMENT 1.1 AMENDMENT OF SECTION 7.1. Section 7.1 of the Note Agreement is amended to read in its entirety as follows: "7.1 Consolidated Tangible Net Worth. The Company will not permit, ------------------------------- at any time, its Consolidated Tangible Net Worth to be less than the lesser of (a) $72,000,000 plus the cumulative sum of 50% of Consolidated Net Income (without reduction for any losses) subsequent to December 31, 1994, or (b) $135,000,000." 1.2 AMENDMENT OF SECTION 7.3. Section 7.3 of the Note Agreement is amended to read in its entirety as follows: "7.3 Current Ratio. The Company will not permit, at any time, the ------------- ratio of Consolidated Current Assets to Consolidated Current Liabilities to be less than 2.2 to 1.0." 1.3 AMENDMENT OF SECTION 7.4(d). Section 7.4(d) of the Note Agreement is amended to read in its entirety as follows: "(d) Additional Indebtedness of the Company or a Restricted Subsidiary, provided that at the time of incurring such additional Indebtedness and after giving effect thereto and to the application of the proceeds therefrom, (i) Consolidated Indebtedness then to be outstanding shall not exceed 60% of Consolidated Net Tangible Assets if such additional Indebtedness is incurred on or before December 31, 1995, or 50% of Consolidated Net Tangible Assets if such additional Indebtedness is incurred after December 31, 1995 and (ii) the pro forma ratio of Consolidated Income Available for Fixed Charges to Fixed Charges for the four consecutive fiscal quarters immediately preceding such date shall not be less than 2.5 to 1.0; and" (S)2 CONSENT, WAIVER AND AGREEMENT. The Holders hereby (i) consent to the Self-Tender and waive any violation of Section 7.8 of the Note Agreement resulting therefrom, (ii) agree that the amount expended by the Company in connection with the Self-Tender shall not constitute a "Restricted Payment", as such term is defined in the Note Agreement and, accordingly, shall not be included in any calculation of aggregate Restricted Payments for the purposes of Section 7.8 of the Note Agreement and (iii) agree that neither the sale of short term investments by the Company to fund the Self-Tender nor the amount expended by the Company in the Self-Tender shall constitute a "Disposition" as such term is defined in Section 7.11 of the Note Agreement. 2. (S)3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. As an inducement to the Holders to enter into this Waiver, the Company represents and warrants that: 3.1 EVENT OF DEFAULT. Upon the effectiveness of this Waiver, there will exist no Default or Event of Default under the Note Agreement, as amended hereby. 3.2 AUTHORIZATION. The execution and delivery by the Company of this Waiver have been duly authorized by proper corporate proceedings, and this Waiver and the Note Agreement, as amended hereby, constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms. 3.3 NO CONFLICT. Neither the execution and delivery by the Company of this Waiver, nor compliance with the provisions hereof or with the Note Agreement as amended hereby, will violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Company or the articles of incorporation or by-laws of the Company or the provisions of any indenture, instrument or agreement to which the Company is a party or is subject, or by which it or its property is bound, or conflict with or constitute a default thereunder. 3.4 REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in Section 3.1 of the Note Agreement are true and correct, in all material respects, as of the date of this Waiver. (S)4. EFFECTIVE DATE OF WAIVER. This Waiver shall be effective as of the date set forth above upon the execution and delivery of this Waiver by the Holders of at least 66-2/3% in aggregate principal amount of the Notes outstanding. (S)5. MISCELLANEOUS. 5.1 RATIFICATION. The Note Agreement, as amended hereby, shall remain in full force and effect and is ratified, approved and confirmed in all respects. 5.2 REFERENCE TO NOTE AGREEMENT. From and after the effective date of this Waiver, each reference in the Note Agreement to "this Agreement," "hereof," or "hereunder" or words of like import, and all references to the Note Agreement in any and all agreements, instrument, documents, notes, certificates and other writings of every kind and nature shall be deemed to mean the Note Agreement, as modified and amended by this Waiver. 3. 5.3 CHOICE OF LAW. This Waiver shall be governed by and construed in accordance with the laws of the State of Illinois. 5.4 EXECUTION IN COUNTERPARTS. This Waiver may be executed in one or more counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the Company and the Holders have caused this Waiver to be executed and delivered by their respective officer or officers thereunto duly authorized. VARCO INTERNATIONAL, INC. By: -------------------------------------- Title: By: -------------------------------------- Title: By: -------------------------------------- Title: FEDERAL KEMPER LIFE ASSURANCE COMPANY By: -------------------------------------- Title: By: -------------------------------------- Title: FIDELITY LIFE ASSOCIATION By: -------------------------------------- Title: By: -------------------------------------- Title: 4. AMERICAN MANUFACTURERS MUTUAL INSURANCE COMPANY By: -------------------------------------- Title: By: -------------------------------------- Title: JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY By: -------------------------------------- Title: JOHN HANCOCK VARIABLE LIFE INSURANCE COMPANY By: -------------------------------------- Title: JOHN HANCOCK LIFE INSURANCE COMPANY OF AMERICA By: -------------------------------------- Title: MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: -------------------------------------- Title: CENTRAL LIFE ASSURANCE COMPANY By: -------------------------------------- Title: 5. SCHEDULE I LIST OF HOLDERS Kemper Investors Life Insurance Company* Federal Kemper Life Assurance Company* Fidelity Life Association* American Manufacturers Mutual Insurance Company* John Hancock Mutual Life Insurance Company John Hancock Variable Life Insurance Company John Hancock Life Insurance Company of America Massachusetts Mutual Life Insurance Company Central Life Assurance Company** - ------------ * Note registered in the name of KEMCO & CO, as nominee. ** Note registered in the name of Salkeld & Co., as nominee for Bankers Trust Company, as custodian. EX-4.12 4 SIXTH AMENDMENT DATED AS OF 3/17/95 TO THE CREDIT AGMT EXHIBIT 4.12 SIXTH AMENDMENT Dated as of March 17, 1995 SIXTH AMENDMENT dated as of March 17, 1995 (this "Amendment") to CREDIT AGREEMENT dated as of February 25, 1993 (as amended by First Amendment dated as of August 3, 1993, Second Amendment dated as of September 23, 1993, Third Amendment dated as of December 1, 1993, Fourth Amendment dated as of May 12, 1994, and Fifth Amendment and Waiver dated as of October 31, 1994, the "Credit Agreement") among VARCO INTERNATIONAL, INC., a California corporation, CITICORP USA, INC. and CITIBANK, N.A. PRELIMINARY STATEMENTS. The parties to the Credit Agreement wish to amend the Credit Agreement in certain respects as hereinafter set forth. Terms defined in the Credit Agreement are used in this Amendment as defined in the Credit Agreement and, except as otherwise indicated, all references to Sections and Articles refer to the corresponding Sections and Articles of the Credit Agreement. The parties hereto therefore agree as follows: SECTION 1. Amendments. Effective as of the Amendment Effective Date (as ---------- defined in Section 2 hereof), and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, the Credit Agreement is hereby amended as follows: a. The definition of "Borrowing Base" in Section 1.01 is amended by -------------- deleting clause (b) and restating it as follows: (b) seventy percent (70%) of Eligible Inventory b. The definition of "Change of Control" in Section 1.01 is deleted and ----------------- restated as follows: "Change of Control" means the acquisition by any Person (or "group" within ----------------- the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) of beneficial ownership of 20% or more of the common stock of the Borrower, or the occurrence of any transaction which has in substance the same effect, except that the term "Change of Control" shall not include the acquisition by Baker Hughes Incorporated of beneficial ownership of 20% or more (but not in excess of 25%) of the common stock of the Company solely as a result of any reduction in the number of outstanding shares of common stock attributable to the Stock Repurchase Program. c. The definition of "Consolidated Fixed Charges" in Section 1.01 is -------------------------- deleted and restated in full as follows: "Consolidated Fixed Charges" means, for any period, the sum of (a) -------------------------- Consolidated Interest Expense for such period plus (b) the amount of any principal payments on Debt (excluding the Subordinated Note, the Subordinated Debentures and Debt included in clauses (c) or (d) of the definition of "Debt") required to be paid during such period. d. The definition of "Loan Maturity Date" in Section 1.01 is deleted and ------------------ restated in full as follows: "Loan Maturity Date" means October 31, 1998 or the earlier date of ------------------ termination in whole of the Commitments pursuant to Section 2.07 or 6.01. e. The definition of "Note" in Section 1.01 is deleted and restated in full ---- as follows: "Note" means the Promissory Note substantially in the form of Exhibit A ---- hereto, made by the Borrower in favor of the Lender to evidence the indebtedness resulting from the Advances. f. The definition of "Stock Repurchase Program" in Section 1.01 is deleted ------------------------ and restated in full as follows: "Stock Repurchase Program" means the purchase by the Borrower at any time ------------------------ or from time to time during the period commencing May 12, 1994 and ending on December 31, 1995 of its common stock for an aggregate cost not exceeding $50,000.000. g. The definition of "Termination Date" in Section 1.01 is deleted and ---------------- restated in full as follows: "Termination Date" means December 31, 1998 or the earlier date of ---------------- termination in whole of the Commitments pursuant to Section 2.07 or 6.01. h. Section 2.01 is deleted and restated as follows: SECTION 2.01 The Advances. The Lender agrees, on the terms and conditions ------------ hereinafter set forth, to make advances (the "Advances") to the Borrower from time to time on any Business Day during the period from the date hereof to, but excluding, the Loan Maturity Date in an amount not to exceed the Availability on such date and in an aggregate amount not to exceed at any time outstanding $25,000,000 as such amount may be reduced pursuant to Section 2.07. Each Advance shall be in an amount not less than $1,000,000 or an integral multiple of $500,000 in excess thereof, except that a Base Rate Advance may be in an ------ amount equal to the maximum Advance available hereunder. Within the limits set forth in this Section 2.01, the Borrower may borrow, repay pursuant to Section 2.11 and reborrow under this Section 2.01. i. Section 4.09 is deleted and restated as follows: SECTION 4.09 Not a Purpose Credit. The Borrower and its Subsidiaries are -------------------- not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation G, U or X issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Advance will be used to purchase or carry any margin stock (other than purchases of common stock of the Borrower not otherwise prohibited by this Agreement) or to extend credit to others for the purpose of purchasing or carrying any margin stock. j. Section 5.01(i) is deleted and restated as follows: (i) Use of Proceeds. The Borrower will use the proceeds of the Advances --------------- for the Stock Repurchase Program and for general corporate purposes. k. Section 5.02(h) is deleted and restated as follows: (h) Prepayment of Senior Notes. The Borrower will not and will not permit -------------------------- any of its Subsidiaries to prepay, redeem, defease (whether actually or in substance) or purchase in any manner (or deposit or set aside funds for the purpose of any of the foregoing), or make any payment in respect of principal of, the Senior Notes; provided that nothing herein shall prohibit the payment of -------- any scheduled principal installments of the Senior Notes. l. Section 5.02(a) is deleted and restated as follows: (o) Capital Expenditures. The Borrower will not and will not permit any of -------------------- its Subsidiaries to make or incur any Capital Expenditures during any fiscal year if the amount of such Capital Expenditures, when added to the aggregate amount of all other Capital Expenditures made by the Borrower and its Subsidiaries on a Consolidated basis during such fiscal year, would exceed 50% of the sum of Consolidated net income of the Borrower and its Subsidiaries for such fiscal year, plus any ---- amount which, in the determination of Consolidated net income for such fiscal year, has been deducted for depreciation and amortization. m. Section 5.02(q) is deleted and restated as follows: (q) Operating Lease Obligations. The Borrower will not and will not permit --------------------------- any of its Subsidiaries to create or suffer to exist any obligations for the payment of rental for any property under leases or agreements to lease with a term of one year or longer (other than Capital Lease Obligations permitted pursuant to Section 5.02(p)), except for such obligations providing for aggregate rentals payable during any fiscal year by the Borrower and its Subsidiaries on a Consolidated basis not exceeding 3% of Consolidated gross revenues of the Borrower and its Subsidiaries for such fiscal year. n. Section 5.03(a) is deleted and restated as follows: (a) Minimum Consolidated Interest Coverage Ratio. At the end of any fiscal -------------------------------------------- quarter the Borrower will not permit the ratio of its Consolidated EBIT to its Consolidated Interest Expense to be less than 3.0 to 1 for the four consecutive fiscal quarter period ending on such date. o. Section 5.03(b) is deleted and restated as follows: (b) Minimum Consolidated Fixed Charge Coverage Ratio. At the end of any ------------------------------------------------ fiscal quarter the Borrower will not permit the ratio of Consolidated Cash Flow to Consolidated Fixed Charges to be less than 1.0 to 1 for the four consecutive fiscal quarter period ending on such date. p. Section 5.03(c) is deleted and restated as follows: (c) Minimum Consolidated Current Ratio. The Borrower will not permit the ---------------------------------- ratio of Consolidated Current Assets to Consolidated Current Liabilities to be less than 2.2 to 1 as of the last day of any fiscal quarter. q. Section 5.03(d) is deleted and restated as follows: (d) Minimum Consolidated Leverage Ratio. The Borrower will not permit the ----------------------------------- ratio of Consolidated Total Liabilities to Consolidated Tangible Net Worth to be more than (a) 1.5 to 1 at any time prior to January 1, 1996, (b) 1.1 to 1 at any time from January 1, 1996 to January 1, 1997, and (c) 1.0 to 1 at any time thereafter. r. Section 5.03(e) is deleted and restated as follows: (e) Minimum Consolidated Tangible Net Worth. The Borrower will not permit --------------------------------------- its Consolidated Tangible Net Worth at any time to fall below an amount equal to the sum of (x) $72,000,000 plus (y) 75% of Consolidated net income of the ---- Borrower and its Subsidiaries, on a cumulative basis, for each fiscal quarter of the Borrower in which such Consolidated net income is positive (beginning with the fiscal quarter ending on March 31, 1995 and including each fiscal quarter of the Borrower ending thereafter). The cumulative total in clause (x) above shall not be reduced or affected by any net losses incurred in any fiscal quarter. s. Exhibit A is deleted and restated in its entirely in the form of Exhibit A hereto. SECTION 2. Conditions to Effectiveness: Consent. This Amendment shall be ------------------------------------ effective as of March 17, 1995 (the "Amendment Effective Date"), subject to the Lender's receipt of: (i) a counterpart of this Amendment executed by the Borrower, (ii) a promissory note substantially in the form Exhibit A hereto made by the Borrower in favor of the Lender (the "Replacement Note"), (iii) a certificate of the Secretary or an Assistant Secretary of the Borrower attaching a copy of the resolutions of the Board of Directors of the Borrower authorizing the execution and delivery of this Amendment and the Replacement Note and certifying the name and true signature of each officer of the Borrower executing this Amendment and the Replacement Note on its behalf, (iv) counterparts of a Consent and Acknowledgment in the form attached as Exhibit B hereto executed by each Guarantor, (v) evidence satisfactory to the Lender of the execution and delivery by the Borrower and the holders of at least 66-2/3% in aggregate principal amount of the Senior Notes of a Waiver and Third Amendment to Note Agreement in the form previously furnished to the Lender (the "Note Agreement Amendment"), (vi) evidence satisfactory to the Lender of the execution and delivery by the Borrower and the holders of at least 66-2/3% in aggregate principal amount of the Senior Notes of the Waiver dated March 8, 1995 in the form previously furnished to the Lender (the "Note Agreement Waiver"), and (vii) evidence satisfactory to the Lender that the execution of this Amendment and performance of the Credit Agreement as hereby amended will not conflict with the Senior Note Agreement and that the covenants of the Senior Note Agreement have been amended so as to be no more restrictive than the covenants set forth in Section 5.03 as hereby amended. The Lender and the Issuing Bank hereby consent to the Note Agreement Amendment and the Note Agreement Waiver, in each case whether the same is executed and delivered before or after the execution and delivery of this Amendment. SECTION 3. Representations and Warranties. The Borrower represents and ------------------------------ warrants as follows as of the date hereof and the Amendment Effective Date: (a) the Borrower is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction indicated at the beginning of this Amendment; (b) the execution, delivery and performance by the Borrower of this Amendment and the Replacement Note are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action and do not contravene the Borrower's charter or by-laws, or any law or any contractual restriction binding on or affecting the Borrower; (c) no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution and delivery by the Borrower of this Amendment and the Replacement Note or for the performance by the Borrower of the Credit Agreement as hereby amended; (d) this Amendment, the Replacement Note and the Credit Agreement as hereby amended constitute the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms; (e) except as set forth in the Notice of Default from the Company to the Lender and the Issuing Bank dated March 8, 1995 (the "Notice of Default"), all representations and warranties of the Borrower set forth in Article IV are true and correct, as if repeated and restated in full herein (except to the extent that such representations and warranties expressly relate solely to an earlier date and then are correct as of such date); and (f) except as set forth in the Notice of Default, no Default or Event of Default has occurred and is continuing. SECTION 4. Reference to and Effect on the Credit Agreement. Upon the ----------------------------------------------- effectiveness of Section 1 hereof, on and after the Amendment Effective Date, (a) each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import, and each reference in the Note or the other Loan Documents to "the Credit Agreement," shall mean and be a reference to the Credit Agreement as amended by this Amendment and (b) each reference in the Credit Agreement and the other Loan Documents to the Note shall mean and be a reference to the Replacement Note. Except as specifically amended above, the Credit Agreement shall continue to be in full force and effect and is hereby in all respects ratified and confirmed. SECTION 5. Execution in Counterparts. This Amendment may be executed in ------------------------- any number of counterparts and by any combination of the parties hereto in separate counterparts, each of which counterparts shall be an original and all of which taken together shall constitute one and the same Amendment. SECTION 6. Governing Law. This Amendment shall be governed by, and ------------- construed in accordance with the laws of the State of New York. SECTION 7. Expenses. Each party hereto shall bear its own costs and -------- expenses (including counsel fees and expenses) in connection with the preparation, execution and delivery of this Amendment. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. VARCO INTERNATIONAL, INC. By:__________________________________ Title:_______________________________ CITICORP USA, INC. By:__________________________________ Vice President CITIBANK, N.A. By:__________________________________ Vice President EXHIBIT A PROMISSORY NOTE $25,000,000 Dated: February 25, 1993 FOR VALUE RECEIVED, the undersigned, Varco International, Inc., a California corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of Citicorp USA, Inc. (the "Lender") on the Loan Maturity Date (as defined in the Credit Agreement) the principal amount of $25,000,000 or, if less, the aggregate principal amount of all Advances made by the Lender to the Borrower pursuant to the Credit Agreement (as hereinafter defined) outstanding on such date. The Borrower promises to pay interest on the principal amount of each Advance from the date of such Advance until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement referred to below. Both principal and interest are payable in lawful money of the United States of America to the Lender at the office of Citibank, N.A. located at 399 Park Avenue, New York, New York 10043 in same day funds. Each Advance made by the Lender to the Borrower, and all payments made on account of the principal amount thereof, shall be recorded by the Lender and, prior to any transfer thereof, endorsed on the grid attached hereto which is a part of this Promissory Note, provided that the failure of the Lender to record or endorse any such matters shall not affect the validity of this Note or the obligations of the Borrower under the Credit Agreement. This Promissory Note is the Note referred to in, and is entitled to the benefits of, the Credit Agreement dated as of February 25, 1993 (as amended to the date hereof and as it may be further amended from time to time, the "Credit Agreement") among the Borrower, the Lender and Citibank, N.A. as Issuing Bank, and the Guaranties referred to therein and entered into pursuant thereto. The Credit Agreement, among other things (i) provides for the making of advances (the "Advances") by the Lender to the Borrower from time to time in an aggregate amount not to exceed at any time outstanding the U.S. dollar amount first above mentioned, the indebtedness of the Borrower resulting from each such Advance being evidenced by this Promissory Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of the principal hereof prior to the maturity hereof upon the terms and conditions therein specified. This Promissory Note is delivered in exchange and substitution for the promissory note of the undersigned dated February 25, 1993 in the principal amount of $13,000,000. VARCO INTERNATIONAL, INC. By:__________________________________ Name:______________________ Title:_______________________ EXHIBIT B CONSENT AND ACKNOWLEDGMENT Each of the undersigned hereby (a) acknowledges receipt of a draft in the form attached as Annex I hereto of the Sixth Amendment dated as of March 17, 1995 (the "Amendment") to the Credit Agreement dated as of February 25, 1993 among Varco International, Inc., Citicorp USA, Inc. and Citibank, N.A. (as amended to the date of the Amendment, the "Credit Agreement"), (b) consents to the terms of the Amendment and (c) confirms and agrees that each Loan Document executed by the undersigned pursuant to and as defined in the Credit Agreement is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects except that, on and after the effective date of the Amendment, (i) each reference in each such Loan Document to "the Credit Agreement," "thereunder," "thereof," "therein" or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended by the Amendment and (ii) each reference to the "Note" shall mean and be a reference to the Replacement Note (as defined in the Amendment). This Consent and Acknowledgment may be executed by the undersigned in two or more counterparts, each of which shall be deemed an original. BEST INDUSTRIES, INC., a Texas corporation By:____________________________ Richard A. Kertson Vice President - Finance MARTIN-DECKER TOTCO, INC., a Texas corporation By:____________________________ Richard A. Kertson Vice President VARCO INTERNATIONAL INC PTE LTD, a corporation organized under the laws of the Republic of Singapore By:____________________________ Richard A. Kertson Director By:____________________________ George Boyadjieff Director VARCO (U.K.) LIMITED, a corporation organized under the Companies Acts in Scotland By:____________________________ Name:__________________________ Director By:____________________________ Name:__________________________ Director 304774 ALBERTA LTD., a corporation organized under the laws of the Province of Alberta, Canada By:____________________________ Richard A. Kertson Vice President - Finance VARCO BJ OIL TOOLS B.V., a corporation organized under the laws of the Netherlands By:____________________________ Name:__________________________ Managing Director By:____________________________ Name:__________________________ Managing Director VARCO SHAFFER, INC., a Texas corporation By:____________________________ Richard A. Kertson Vice President - Finance METROX, INC., a California corporation By:____________________________ Richard A. Kertson Vice President RIG TECHNOLOGY LIMITED By:____________________________ Richard A. Kertson Director By:____________________________ George Boyadjieff Director EX-4.13 5 SEVENTH AMENDMENT DATED AS OF 12/31/95 TO THE CREDIT AGMT EXHIBIT 4.13 SEVENTH AMENDMENT Dated as of December 31, 1995 SEVENTH AMENDMENT dated as of December 31, 1995 (this "Amendment") to CREDIT AGREEMENT dated as of February 25, 1993 (as amended by First Amendment dated as of August 3, 1993, Second Amendment dated as of September 23, 1993, Third Amendment dated as of December 1, 1993, Fourth Amendment dated as of May 12, 1994, Fifth Amendment and Waiver dated as of October 31, 1994, and Sixth Amendment dated as of March 17, 1995, the "Credit Agreement") among VARCO INTERNATIONAL, INC., a California corporation, CITICORP USA, INC. and CITIBANK, N.A. PRELIMINARY STATEMENTS. The parties to the Credit Agreement wish to amend the Credit Agreement in certain respects as hereinafter set forth. Terms defined in the Credit Agreement are used in this Amendment as defined in the Credit Agreement and, except as otherwise indicated, all references to Sections and Articles refer to the corresponding Sections and Articles of the Credit Agreement. The parties hereto therefore agree as follows: SECTION 1. Amendment. Effective as of the Effective Date (as defined in --------- Section 2 hereof), and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, the definition of "Stock Repurchase Program" in ------------------------ Section 1.01 is deleted and restated in full as follows: "Stock Repurchase Program" means the purchase by the Borrower at any ------------------------ time or from time to time during the period commencing on May 12, 1994 and ending on December 31, 1996 of its common stock for an aggregate cost not exceeding $50,000,000. SECTION 2. Conditions to Effectiveness. This Amendment shall be effective --------------------------- as of December 31, 1995 (the "Effective Date"), subject to the Lender's receipt of: (i) a counterpart of this Amendment executed by the Borrower, (ii) a certificate of the Secretary or an Assistant Secretary of the Borrower attaching a copy of the resolutions of the Board of Directors of the Borrower authorizing the execution and delivery of this Amendment and certifying the name and true signature of each officer of the Borrower executing this Amendment on its behalf, and (iii) counterparts of a Consent and Acknowledgement in the form attached as Annex A hereto executed by each Guarantor. SECTION 3. Representations and Warranties. The Borrower represents and ------------------------------ warrants as follows as of the date hereof and the Effective Date: (a) the Borrower is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction indicated at the beginning of this Amendment; (b) the execution, delivery and performance by the Borrower of this Amendment are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action and do not contravene the Borrower's charter or by-laws, or any law or any contractual restriction binding on or affecting the Borrower; (c) no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution and delivery by the Borrower of this Amendment or for the performance by the Borrower of the Credit Agreement as hereby amended; (d) this Amendment and the Credit Agreement as hereby amended constitute the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms; (e) all representations and warranties of the Borrower set forth in Article IV are true and correct, as if repeated and restated in full herein (except to the extent that such representations and warranties expressly relate solely to an earlier date and then are correct as of such date); and (f) no Default or Event of Default has occurred and is continuing. SECTION 4. Reference to and Effect on the Credit Agreement. Upon the ----------------------------------------------- effectiveness of Section 1 hereof, on and after the Effective Date, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and each reference in the Note or the other Loan Documents to "the Credit Agreement", shall mean and be a reference to the Credit Agreement as amended by this Amendment. Except as specifically amended above, the Credit Agreement shall continue to be in full force and effect and is hereby in all respects ratified and confirmed. SECTION 5. Execution in Counterparts. This Amendment may be executed in ------------------------- any number of counterparts and by any combination of the parties hereto in separate counterparts, each of which counterparts shall be an original and all of which taken together shall constitute one and the same Amendment. SECTION 6. Governing Law. This Amendment shall be governed by, and ------------- construed in accordance with, the laws of the State of New York. SECTION 7. Expenses. Each party hereto shall bear its own costs and -------- expenses (including counsel fees and expenses) in connection with the preparation, execution and delivery of this Amendment. 2. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. VARCO INTERNATIONAL, INC. By:____________________________ Title:_________________________ CITICORP USA, INC. By:____________________________ Vice President CITIBANK, N.A. By:____________________________ Vice President 3. EX-10.7 6 AMENDMENT TO STOCK BONUS PLAN EXHIBIT 10.7 Varco International Inc. Amendment to Stock Bonus Plan RESOLVED, that Sections 4.02 and 6.02 of the Varco International Inc. Stock Bonus Plan be, and the same hereby are, amended to read in their entirety as follows: "4.02 The total number of shares of Common Stock which may be subject to Bonus Awards granted under the Plan shall not exceed 1,000,000 shares, subject, however, to adjustment pursuant to the provisions of Section 4.03. Any shares of Common Stock subject to Bonus Awards granted under the Plan but not issued because of the termination of an Employee's employment with the Company or otherwise shall not be available for the grant of future Bonus Awards under the Plan". "6.02 The Board may at any time terminate the Plan by appropriate corporate resolution. Unless sooner terminated by the Board, the Plan shall automatically terminate upon the earlier of (i) the 15th anniversary of the date the Plan was adopted by the Board or (ii) the first date when all the shares available for the grant of Bonus Awards under the Plan shall have been granted. Under no circumstances shall the termination of the Plan affect the rights of any Employee with respect to any Bonus Award granted to him prior to such termination, and any such Bonus Award shall continue to be paid in accordance with its designated payment schedule. EX-10.12 7 1995 AMENDMENT TO GROUND LEASE EXHIBIT 10.12 1995 AMENDMENT TO GROUND LEASE (759 NORTH ECKHOFF, ORANGE, CALIFORNIA) --------------------------------------- THIS 1995 AMENDMENT TO GROUND LEASE ("AMENDMENT") is made as of the 11TH --------- day of January, 1996, by and among WALTER B. REINHOLD, G. J. BECKER and RUTH M. BECKER, Trustees of THE G. J. BECKER FAMILY TRUST, dated July 6, 1981, HOWARD PERRY LORENZ, as Executor of THE ESTATE OF CHARLOTTE LORENZ, deceased, B. REINHOLD, JR. and MARY E. REINHOLD, Trustees of THE REINHOLD TRUST dated August 28, 1989, HOWARD PERRY LORENZ, as Trustee of THE CHARLOTTE L. TEDHAMS IRREVOCABLE TRUST Under Indenture dated March 1, 1982, and LEO J. PIRCHER (as and collectively hereinafter called "LESSORS"), and VARCO INTERNATIONAL, INC., a ------- California corporation (as and hereinafter called "LESSEE"). ------ WITNESSETH THAT WHEREAS A. Lessors are the lessors under that certain ground lease captioned "GROUND LEASE", dated as of March 7, 1975, between W.B. Reinhold, B. Reinhold, ------------ Jr., Charlotte Lorenz, G.J. Becker and Ruth M. Becker and Leo J. Pircher and Phyllis M. Pircher, as lessors, and Lessee, as lessee, as amended by amendments dated as of May 1, 1975, January 1, 1982, January 1, 1984, February 8, 1985 and April 12, 1985 (as amended prior to the date hereof, the "GROUND LEASE"). The ------------ real property subject to the Ground Lease (referred to in the Ground Lease, and hereinafter called, "SAID PREMISES") is more particularly described in Exhibit ------------- "A", hereunto annexed and made a part hereof and prior to the conveyance described in paragraph 1 hereof, comprised approximately 8.845 acres. Said Premises are improved with a facility used by Lessee primarily for manufacturing purposes. B. Lessors (other than B. Reinhold Jr. and Mary E. Reinhold and Howard Perry Lorenz as Trustee of the Charlotte L. Tedhams Irrevocable Trust) are also the lessors (together with Baldwin Terry Reinhold and Carol Anne Reinhold as Trustees of the Reinhold Family Trust dated August 9, 1993) under that certain Lease ("ADJOINING PROPERTY LEASE") captioned ------------------------ 1 "STANDARD INDUSTRIAL LEASE - NET" dated September 29, 1988 between Alfred F. DeLeo, Charlotte R. Lorenz and The G.J. Becker Family Trust, as lessors, and Lessee, as lessee. The real property subject to the Adjoining Property Lease ("ADJOINING PROPERTY") adjoins Said Premises and is described in Exhibit "B", ------------------ hereunto annexed and made a part hereof. The Adjoining Property is improved with an office building used primarily as the home office of Lessee. C. Lessee has advised Lessors that it desires to expand the improvements on the Adjoining Property by the addition of approximately 10,000 square feet of space; that, however, in order to accomplish such expansion, it will be necessary to place a portion of the added improvements on Said Premises and, in addition, to use a portion of Said Premises for parking and other uses associated with the office building; that accordingly, Lessee desires that a portion of Said Premises be added to the premises subject to the Adjoining Property Lease. D. Lessors have advised Lessee that they are agreeable to adding a portion of Said Premises to the Adjoining Property Lease as aforesaid, provided Lessee obtains all required governmental approvals associated therewith (including, but not limited to, the approval of the City of Orange, California to a lot line adjustment) and agrees, in addition, to certain amendments to the Ground Lease as hereinafter set out. Lessee has advised Lessors that it has obtained all such governmental approvals and that it is agreeable to such amendments. NOW THEREFORE, in consideration of the premises and the respective undertaking of the parties hereinafter set forth, it is hereby agreed as follows: 1. Premises subject to Ground Lease. Concurrently with the execution -------------------------------- hereof, Lessee and the lessors of the Adjoining Property Lease are amending the Adjoining Property Lease to, among other things, add approximately .5 acre of Said Premises to the Adjoining Property (the portion of Said Premises so added will be herein called "TRANSFERRED PROPERTY"). As of the date hereof, the Ground -------------------- Lease shall be terminated with respect only to the Transferred Property and Said Premises shall be the real property described in said Exhibit "A" except for 2 the Transferred Property. After the conveyance of the Transferred Property as aforesaid, the legal description of Said Premises shall be as set forth in Exhibit "C", hereunto annexed and made a part hereof. 2. Continuation of Lessors' Rights. Notwithstanding the termination of the ------------------------------- Ground Lease with respect thereto, Lessors' rights and interests under the Ground Lease from and after the date hereof shall remain the same as if the Transferred Property had not been added to the Adjoining Property Lease as aforesaid, but, instead, had remained subject to the Ground Lease for the entire remaining term of the same. Accordingly, and without limitation on the foregoing: (a) the rental payable under the Ground Lease shall not be reduced now or in the future as a result of the reduction of the real property subject to the Ground Lease resulting from the termination of the Ground Lease with respect to the Transferred Property; and therefore, each Rental Adjustment pursuant to paragraph 2 of the Ground Lease made after the date hereof shall be calculated as though the Transferred Property were still subject to the Ground Lease (and thus in determining each such Rental Adjustment, the fair rental value of the said Premises shall be deemed to be the fair rental value of the real property described in Exhibit "A" hereof, undiminished by the Transferred Property); and (b) in the event of any purchase of said Premises by Lessee from Lessors pursuant to the Ground Lease, the real property purchased shall not include the Transferred Property, but, nevertheless, the purchase price of the real property so purchased shall be determined as if said Premises included the Transferred Property, and, therefore, such purchase price shall include the value of the Transferred Property. 3. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 4. Successors and Assigns. This Agreement shall be binding upon and inure ---------------------- to the benefit of the parties hereto and their respective heirs, successors and assigns. As modified herein, the terms and provisions of the Ground Lease are hereby ratified and confirmed in their entirety. 3 IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first above written. LESSORS: ------- /S/ WALTER B. REINHOLD ---------------------- WALTER B. REINHOLD THE G. J. BECKER FAMILY TRUST By /S/ G.J. BECKER --------------- G. J. Becker, Trustee By /S/ RUTH M. BECKER ------------------ Ruth M. Becker, Trustee THE ESTATE OF CHARLOTTE LORENZ By /S/ HOWARD PERRY LORENZ ----------------------- Howard Perry Lorenz, Executor THE REINHOLD TRUST dated August 28, 1989 By: /S/ BALDWIN REINHOLD, JR. ------------------------- Baldwin Reinhold, Jr., Trustee By: /S/ MARY E. REINHOLD -------------------- Mary E. Reinhold, Trustee 4 THE CHARLOTTE L. TEDHAMS IRREVOCABLE TRUST dated March 1, 1982 By: /S/ HOWARD PERRY LORENZ ----------------------- Howard Perry Lorenz, Trustee /S/ LEO J. PIRCHER ------------------ LEO J. PIRCHER LESSEE: ------ VARCO INTERNATIONAL, INC., a California corporation By: /S/ R.A. KERTSON ---------------- Its: Vice President 5 Exhibit "A" DESCRIPTION THAT PORTION OF LOTS 5 AND 6 OF THE GLASSELL AND CHAPMAN TRACT, IN THE CITY OF ORANGE, COUNTY OF ORANGE, STATE OF CALIFORNIA, AS SHOWN ON A MAP RECORDED IN BOOK 5, PAGE 408 OF MISCELLANEOUS RECORDS IN THE OFFICE OF THE COUNTY RECORDER OF LOS ANGELES COUNTY, CALIFORNIA, TOGETHER WITH THAT PORTION OF THE LAND ALLOTTED TO ALFRED B. CHAPMAN IN DECREE OF PARTITION OF THE RANCHO SANTIAGO DE SANTA ANA RECORDED IN BOOK B OF JUDGMENTS, OF THE 17TH JUDICIAL DISTRICT COURT OF CALIFORNIA, DESCRIBED AS FOLLOWS: BEGINNING AT THE INTERSECTION OF THE SOUTHWESTERLY RIGHT OF WAY LINE OF THE ATCHISON, TOPEKA AND SANTA FE RAILWAY COMPANY AS DESCRIBED IN DEED RECORDED FEBRUARY 6, 1889 IN BOOK 542, PAGE 21 OF DEEDS, RECORDS OF LOS ANGELES COUNTY, CALIFORNIA WITH THE CENTERLINE OF ECKHOFF STREET DESCRIBED IN PARCEL Y68-110 IN THAT CERTAIN FINAL ORDER OF CONDEMNATION, S.C.C. 143799, FILED MARCH 20, 1967, A CERTIFIED COPY OF WHICH WAS RECORDED MARCH 20, 1967 IN BOOK 8203, PAGE 278 OF OFFICIAL RECORDS IN THE OFFICE OF THE COUNTY RECORDER OF ORANGE COUNTY, CALIFORNIA; THENCE SOUTH 70 DEGREES 38' 25" EAST 811.98 FEET ALONG SAID SOUTHWESTERLY RIGHT OF WAY LINE; THENCE SOUTH 19 DEGREES 21' 35" WEST 481.42 FEET; THENCE NORTH 89 DEGREES 32' 47" WEST 590.24 FEET TO A POINT ON THE SAID CENTERLINE OF ECKHOFF STREET, SAID POINT BEING ON A CURVE CONCAVE EASTERLY AND HAVING A RADIUS OF 1000.00 FEET, A RADIAL LINE TO SAID POINT BEARS SOUTH 78 DEGREES 28' 20" WEST; THENCE NORTHERLY ALONG SAID CENTERLINE OF ECKHOFF STREET AND ALONG SAID CURVE THROUGH A CENTRAL ANGLE OF 11 DEGREES 57' 49" AN ARC DISTANCE OF 208.80 FEET; THENCE NORTH 0 DEGREES 26' 09" EAST 511.26 FEET ALONG SAID CENTERLINE OF ECKHOFF STREET TO THE POINT OF BEGINNING. EXCEPTING THEREFROM THAT PORTION LYING WESTERLY OF A LINE PARALLEL WITH AND DISTANT EASTERLY 30.00 FEET FROM THE CENTERLINE OF ECKHOFF STREET, AS SAID CENTERLINE IS DESCRIBED IN PARCEL Y68-110 IN FINAL ORDER OF CONDEMNATION RECORDED MARCH 20, 1967 IN BOOK 8203, PAGE 278 OF OFFICIAL RECORDS. Exhibit "A" ALSO EXCEPTING THEREFROM THE SOUTHWESTERLY 10.00 FEET OF THAT PORTION DESCRIBED IN PARCEL NO. Y68-108.1 IN SAID FINAL ORDER OF CONDEMNATION AND IN PARCEL 109.1 OF A DEED RECORDED APRIL 13, 1966 IN BOOK 7898, PAGE 562 OF OFFICIAL RECORDS. Exhibit "B" DESCRIPTION PARCEL A: PARCEL 1, IN THE CITY OF ORANGE, COUNTY OF ORANGE, STATE OF CALIFORNIA, AS SHOWN ON PARCEL MAP NO. 84 758, AS PER MAP FILED IN BOOK 206, PAGES 4 AND 5 OF PARCEL MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY. PARCEL B: AN EASEMENT FOR INGRESS AND EGRESS AND DRAINAGE OVER THE FOLLOWING: THAT PORTION OF PARCEL 2 OF PARCEL MAP NO. 84-758 IN THE CITY OF ORANGE, COUNTY OF ORANGE, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 206, PAGES 4 AND 5 OF PARCEL MAPS, RECORDS OF SAID COUNTY, BEING A STRIP OF LAND 12.50 FEET WIDE, THE SOUTHERLY AND WESTERLY LINES OF WHICH ARE PARALLEL WITH AND 12.50 FEET SOUTHERLY AND WESTERLY OF THAT CERTAIN LINE COMMON TO PARCEL 1 AND PARCEL 2 AS SHOWN ON SAID PARCEL MAP, SAID COMMON LINE BEING DESCRIBED AS FOLLOWS: BEGINNING AT THE NORTHWEST CORNER OF SAID PARCEL 2, SAID POINT BEING IN THE EASTERLY LINE OF ECKHOFF STREET AS SHOWN ON SAID PARCEL MAP; THENCE, ALONG SAID COMMON LINE, NORTH 73 DEGREES 26' 09" EAST, 20.00 FEET; THENCE, SOUTH 77 DEGREES 54' 01" EAST, 40.14 FEET; THENCE SOUTH 89 DEGREES 32' 47" EAST, 169.50 FEET; THENCE, SOUTH 00 DEGREES 27' 13" WEST, 150.52 FEET IN THE NORTHERLY LINE OF SEQUOIA AVENUE, AS SHOWN ON SAID PARCEL MAP. THE SIDELINES OF SAID 12.50 FOOT EASEMENT SHALL BE PROLONGED OR SHORTENED TO MEET AT ANGLE POINTS AND TO TERMINATE AT SAID EASTERLY LINE OF ECKHOFF STREET AND SAID NORTHERLY LINE OF SEQUOIA AVENUE. Exhibit "C" DESCRIPTION Parcel 2 of that certain Lot Line adjustment No. LL-95-8 recorded October 10, 1995 as instrument No. 95-444698, and re-recorded November 14, 1995 as instrument No. 95-505666, Official Records, County of Orange, State of California. EX-10.15 8 FIRST AMENDMENT TO OFFICE LEASE EXHIBIT 10.15 FIRST AMENDMENT TO LEASE (743 NORTH ECKHOFF, ORANGE, CALIFORNIA) --------------------------------------- THIS FIRST AMENDMENT TO LEASE ("AMENDMENT") is made as of the 11th day of --------- January, 1996, by and among WALTER B. REINHOLD, G. J. BECKER and RUTH BECKER, Trustees of THE G. J. BECKER FAMILY TRUST, dated July 6, 1981, HOWARD PERRY LORENZ, as Executor of THE ESTATE OF CHARLOTTE R. LORENZ, deceased, BALDWIN TERRY REINHOLD and CAROL ANNE REINHOLD, Trustees of THE REINHOLD FAMILY TRUST dated August 9, 1993 and LEO J. PIRCHER (as and collectively hereinafter called "LESSOR"), and VARCO INTERNATIONAL, INC., a California corporation (as and ------ hereinafter called "LESSEE") ------ WITNESSETH THAT WHEREAS A. Lessor is the owner of the improved real property described in Exhibit "A" hereunto annexed and made a party hereof. By lease ("ORIGINAL LEASE") -------------- captioned "STANDARD INDUSTRIAL LEASE - NET" dated September 29, 1988, Alfred F. ------------------------------- DeLeo, Charlotte R. Lorenz and The G.J. Becker Family Trust (predecessors in interest of Lessor) leased to Lessee a portion of the real property described in said Exhibit "A" (the real property covered by the Original Lease being herein called "ORIGINAL DEMISED PREMISES"). ------------------------- B. Lessee has advised Lessor that Lessee desires that the existing building on said real property (which is used principally as Lessee's home office) be expanded by the addition of approximately 10,000 square feet of space and that in order to accommodate such expansion, additional land must be added to the real property demised under the Original Lease. In addition, Lessee has requested that Lessor contribute $625,000 toward the cost of such expansion. C. Lessor is agreeable to adding additional land to the real property demised under the Original Lease in order to accommodate such expansion and to contributing $625,000 toward the cost of such expansion, provided the term of the Original Lease is extended and the rent increased as hereinafter provided and the other changes are made in the 1 Original Lease as hereinafter set forth. As used herein, the term "LEASE" shall ----- mean the Original Lease as amended by this Amendment. NOW, THEREFORE, in consideration of the premises and respective undertakings of the parties hereinafter set forth, it is hereby agreed as follows: 1. Premises. Exhibit "A" to the Original Lease, which describes the -------- land demised thereunder, is hereby deleted and Exhibit "I", hereunto annexed and made a part hereof, is hereby substituted therefor. From and after the date hereof, "THE PREMISES" (i.e. the real property subject to the Lease) shall be ------------ the land described in said Exhibit "1" and all improvements now or hereafter thereon. 2. Term. Paragraph 3.1 of the Original Lease is hereby amended to read ---- as follows: "3.1 Term. The term of this Lease shall commence on September 29, -------- 1988 and shall end on December 31, 2005, unless sooner terminated pursuant to any provision hereof." 3. Rent. Paragraph 4 of the Original Lease is hereby amended to read ---- as follows: "4. Lessee shall pay the Lessor as rent for the Premises, monthly payments in advance on the first day of each month of the term hereof, as follows: $12,797.85 per month through February, 1990; commencing March 1, 1990, $19,762.00 per month through February 6, 1996; commencing February 7, 1996, $29,250.70 per month; all of the foregoing subject to paragraphs 48 and 49 hereof. Rent for any period during the term hereof which is for less than one (1) month shall be a prorata portion of the monthly installment for such month. Rent shall be payable in lawful money of the United States to Lessor as designated from time to time in writing to Lessee by Lessor (or the persons comprising Lessor, with respect to the share of such person)." 2 5. Notices. Paragraph 23 of the Original Lessee is hereby amended to read ------- as follows: "23 Notices. Any notice which a party is required or may desire to give the other shall be in writing and may be sent by personal delivery or by mail (either [i] by United States registered or certified mail, return receipt requested, postage prepaid, or [ii] by Federal Express or similar generally recognized overnight carrier regularly providing proof of delivery), addressed as follows (subject to the right of a party to designate a different address for itself by notice similarly given): TO LESSOR: ---------- c/o Leo J. Pircher, Esq. 1999 Avenue of the Stars 26th Floor Los Angeles, California 90067 TO LESSEE: ---------- 743 N. Eckhoff Street Orange, California 92668 Attn: Mr. Richard Kertson Any notice so given by mail shall be deemed to have been given as of the date of delivery (whether accepted or refused) established by U.S. Post Office return receipt or the overnight carrier's proof of delivery, as the case may be. Any such notice not so given shall be deemed given upon receipt of the same by the party to whom the same is to be given." 6. Rent Adjustment. Paragraph 49 of the Original Lease is hereby amended as --------------- follows: (a) Subparagraph (a) of said paragraph 49 is hereby amended to read as 3 follows: "(a) On May 1, 1991, November 1, 1993, May 1, 1996, November 1, 1998, May 1, 2001 and November 1, 2003, the monthly rent payable under paragraph 4 of the Lease shall be adjusted by the increase, if any, from the date this Lease commenced, in The Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for Urban Wage Earners and Clerical Workers, Los Angeles - Anaheim - Riverside, California (1967 = 100), "ALL ITEMS", herein --------- referred to as C.P.I.." ------ (b) Subparagraph (b) of said paragraph 49 is hereby amended to read as follows: "(b) The monthly rent payable in accordance with subparagraph (a) of this paragraph 49, shall be calculated as follows: (i) With respect to the adjustments on May 1, 1991 and November 1, 1993, the rent payable commencing March 1, 1990 (i.e. $19,762.00 per month) shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the calendar month as of which the adjustment is to take effect, and the denominator of which shall be the C.P.I. for the calendar month in which the original Lease term commences (i.e. September 1988). The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall such new monthly rent be less than the rent payable for the month immediately preceding the date for rent adjustment. In no event shall the C.P.I. of the calendar month as of which the adjustment is to take place (i.e. May, 1991 or November, 1993, as the case may be) be deemed to exceed the C.P.I. for the calendar month in which the original lease term commences (i.e. September, 1988) by more than 7% multiplied by the number of years and fraction of a year between September, 1988 and the calendar month as of which the adjustment is to take place, inclusive, nor be deemed to be less than 3% multiplied by the number of years and fraction of a year between September, 1988 and the calendar month as of which the adjustment is to take place, inclusive. 4 (ii) With respect to the adjustments on May 1, 1996, November 1, 1998, May 1, 2001 and November 1, 2003, the adjustment shall be made in two parts as follows: (A) The monthly rent payable commencing March 1, 1990 (i.e. $19,762.00 per month) shall be multiplied by a fraction the numerator of which shall be the C.P.I of the calendar month as of which the adjustment is to take effect, and the denominator of which shall be the C.P.I. for the calendar month in which the original Lease term commences (i.e. September 1988); In no event shall the C.P.I. of the calendar month as of which the adjustment is to take place (i.e. May, 1991 or November, 1993, as the case may be) be deemed to exceed the C.P.I. for the calendar month in which the original Lease term commences (i.e. September, 1988) by more than 7% multiplied by the number of years and fraction of a year between September, 1988 and the calendar month as of which the adjustment is to take place, inclusive, nor be deemed to be less than 3% multiplied by the number of years and fraction of a year between September, 1988 and the calendar month as of which the adjustment is to take place, inclusive. (B) In addition, the monthly rent added as of the date of this Amendment (i.e. $5,208.34 per month) shall be multiplied by a fraction, the numerator of which shall be the C.P.I of the calendar month ("CALCULATION ------------ MONTH") as of which the adjustment is to take effect, and the denominator of - ----- which shall be the C.P.I. for the calendar month ("BASE MONTH") in which this ---------- Amendment is entered into (i.e. December 1995); In no event shall the C.P.I. of the Calculation Month be deemed to exceed the C.P.I. for the Base Month by more than 7% multiplied by the number of years and fraction of a year between the Base Month and Calculation Month, inclusive, nor be deemed to be less than 3% multiplied by the number of years and fraction of a year between the Base Month and Calculation Month, inclusive. The new monthly rent hereunder shall be the sum of the amounts calculated under clauses (A) and (B) above, but in no event shall such new monthly rent be less than the rent payable for the month immediately preceding the date for rent adjustment." 5 (c) Subparagraph (e) of said paragraph 49 is hereby deleted. 7. Option to Extend. The parties agree that the option of the Lessee to ---------------- extend the term of the Lease for a sixty (60) month period commencing when the original term of the Lease expires, as such option is set forth in paragraph 50 of the Original Lease, shall apply to the Lease as amended hereby; that, however, the sixty (60) month "Option Period" with respect to which such option shall apply shall commence when the original term of this Lease expires, as such term is extended by paragraph 2 hereof (i.e. December 31, 2005). 8. Expansion: The Original Lease is hereby amended by adding a new ---------- paragraph 53, which shall read as follows: "53 Construction and Tenant Allowances on Expansion. ----------------------------------------------- A. Lessee intends to expand the improvements included in the Premises over and above those existing as of January 1, 1995 by, among other things, the addition of approximately 10,000 square feet of space and related parking facilities. Lessee shall furnish all of the materials, provide all of the fixtures, equipment and personal property and perform all of the work in accordance with the terms hereinafter set forth, required to complete such expansion, including, but not limited to, all building additions, tenant improvements and, without limitation, other work relating to or necessitated by the same. All improvements and property comprising or relating to such expansion, including, but not limited to, such building additions, tenant improvements and other work, shall be deemed to be a part of the Premises. The materials, fixtures, equipment, personal property and work required as aforesaid will herein collectively be called the "EXPANSION." --------- "B. Lessee shall construct, complete and provide the Expansion in a good and workmanlike manner, free from material defects, in accordance with all agreements, encumbrances and restrictions ("BUSINESS AGREEMENT(S)") affecting --------------------- the Premises or any part thereof, and all federal, state and local laws, ordinances, rules, regulations, and orders (including, but not limited to, those relating to the environment, health and safety or 6 handicapped persons), including any of the same with respect to which the requirement of compliance is deferred for any reason to a time after the completion of the Expansion. "C. In a timely manner, Lessee shall obtain all licenses and permits (including building permits and certificates of occupancy) necessary or desirable in connection with the Expansion. Lessee shall (a) promptly satisfy all conditions shown on any temporary certificates of occupancy issued in connection with the Expansion, (b) promptly cause each such temporary certificate of occupancy to be renewed until a final and unqualified certificate of occupancy is issued in replacement thereof, and (c) promptly cause to be delivered to Lessor final, unqualified and unconditional certificates of occupancy relating to all the Expansion. "D. Lessee shall promptly complete the Expansion (but in no event later than the earliest date required by any Business Agreement or any law, ordinance, rule, regulation or order). "E. Lessor will have the right to enter upon and inspect the construction, but neither the exercise of such right, nor the failure to exercise the same, nor Lessor's acceptance of the Expansion in whole or in part will relieve Lessee of its liability or responsibility hereunder for any failure to comply with its obligations hereunder. "F. Lessee shall cause the work under this paragraph 53 to be performed on a lien-free basis, and, in the event of the filing of a mechanic's or materialman's lien or liens with respect thereto, shall cause the same to be immediately discharged at Lessee's sole cost and expense. "G. Neither Lessee nor any contractor or subcontractor or supplier of Lessee shall be the agent of Lessor and no person employed by Lessee or any contractor, subcontractor or supplier shall be an agent or employee of or under the direction of Lessor. 7 "H. On the date of this Amendment, Lessor shall deliver to Lessee the sum of $625,000 as full compensation for the performance by Lessee of its duties and obligations under this paragraph 53, as the same may hereafter be modified with Lessor's approval. Accordingly, and without limitation on the foregoing, all performance by Lessee under this paragraph 53 shall be at its sole cost and expense (it being fully compensated for the same by the payment of said $625,000 as aforesaid)." 8. No Representations or Warranties by Lessor. Except as provided in ------------------------------------------ paragraph 38 of the Lease, Lessee has acquired and is acquiring its interest and estate in the Premises pursuant to the Lease on an "as is" basis without ----- representations or warranties of any kind or nature, express, implied or otherwise, including, but not limited to, any representation or warranty concerning the physical condition of the Premises (Lessee acknowledging that it has occupied the Premises, including the portion of the same added by this Amendment, for many years and is fully familiar with the same and its physical condition). 9. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 10. Successors and Assigns. This Agreement shall be binding upon and inure ---------------------- to the benefit of the parties hereto and their respective heirs, successors and assigns. As modified herein, the terms and provision of the Lease are hereby ratified and confirmed in their entirety. IN WITNESS WHEREOF, the parties have executed this First Amendment to Lease as of the day and year first above written. LESSORS: ------- /S/ WALTER B. REINHOLD ---------------------- WALTER B. REINHOLD 8 THE G. J. BECKER FAMILY TRUST By /S/ G.J. BECKER --------------- G. J. Becker, Trustee By /S/ RUTH BECKER --------------- Ruth Becker, Trustee THE ESTATE OF CHARLOTTE LORENZ By /S/ HOWARD PERRY LORENZ ----------------------- Howard Perry Lorenz, Executor THE REINHOLD FAMILY TRUST By /S/ BALDWIN TERRY REINHOLD -------------------------- Baldwin Terry Reinhold, Trustee By /S/ CAROL ANNE REINHOLD ----------------------- Carol Anne Reinhold, Trustee /S/ LEO J. PIRCHER ------------------ LEO J. PIRCHER LESSEE: ------ VARCO INTERNATIONAL, INC., a California corporation By: /S/ R.A. KERTSON ---------------- Its: Vice President 9 Exhibit "A" DESCRIPTION PARCEL A: PARCEL 1 OF LOT LINE ADJUSTMENT NO. LL-95-8, IN THE CITY OF ORANGE, COUNTY OF ORANGE, STATE OF CALIFORNIA, RECORDED OCTOBER 10, 1995 AS INSTRUMENT NO. 95-444698 AND RE-RECORDED NOVEMBER 14, 1995 AS INSTRUMENT NO. 95-505666 OF OFFICIAL RECORDS OF ORANGE COUNTY CALIFORNIA. PARCEL B: AN EASEMENT FOR INGRESS AND EGRESS AND DRAINAGE OVER THE FOLLOWING: THAT PORTION OF PARCEL 2 OF PARCEL MAP NO. 84-758 IN THE CITY OF ORANGE, COUNTY OF ORANGE, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 206, PAGES 4 AND 5 OF PARCEL MAPS, RECORDS OF SAID COUNTY, BEING A STRIP OF LAND 12.50 FEET WIDE, THE SOUTHERLY AND WESTERLY LINES OF WHICH ARE PARALLEL WITH AND 12.50 FEET SOUTHERLY AND WESTERLY OF THAT CERTAIN LINE COMMON TO PARCEL 1 AND PARCEL 2 AS SHOWN ON SAID PARCEL MAP, SAID COMMON LINE BEING DESCRIBED AS FOLLOWS: BEGINNING AT THE NORTHWEST CORNER OF SAID PARCEL 2, SAID POINT BEING IN THE EASTERLY LINE OF ECKHOFF STREET AS SHOWN ON SAID PARCEL MAP; THENCE, ALONG SAID COMMON LINE, NORTH 73 DEGREES 26' 09" EAST, 20.00 FEET; THENCE, SOUTH 77 DEGREES 54' 01" EAST, 40.14 FEET; THENCE SOUTH 89 DEGREES 32' 47" EAST, 169.50 FEET; THENCE, SOUTH 00 DEGREES 27' 13" WEST, 150.52 FEET IN THE NORTHERLY LINE OF SEQUOIA AVENUE, AS SHOWN ON SAID PARCEL MAP. THE SIDELINES OF SAID 12.50 FOOT EASEMENT SHALL BE PROLONGED OR SHORTENED TO MEET AT ANGLE POINTS AND TO TERMINATE AT SAID EASTERLY LINE OF ECKHOFF STREET AND SAID NORTHERLY LINE OF SEQUOIA AVENUE. EX-10.19 9 AMENDMENT TO VARCO 1980 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.19 Varco International Inc. Amendment to Varco 1980 Employee Stock Purchase Plan RESOLVED, that Sections 3.2 and 6.1 of the Varco 1980 Employee Stock Purchase Plan be, and the same hereby are, amended to read in their entirety as follows: "3.2 Term of the Plan. The Plan shall remain in force for a period of ----------------- twenty-five years following its effective date unless it is sooner terminated by a resolution adopted by the Company's Board of Directors. Termination of the Plan by action of the Board of Directors shall not diminish the Rights of any existing Participant, nor shall it impair the Company's obligations under any outstanding Rights". "6.1 Shares Subject to the Plan. Subject to the provisions in Section --------------------------- 9 (relating to adjustment upon changes in the Company's capitalization), shares of stock sold pursuant to Rights existing under the Plan shall not exceed, in the aggregate, 2,000,000 shares of the Company's authorized Stock. These shares may be unissued or reacquired shares, or shares purchased on the market for purposes of the Plan". EX-10.24 10 1994 DIRECTORS' STOCK OPTION PLAN EXHIBIT 10.24 VARCO INTERNATIONAL, INC. 1994 DIRECTORS' STOCK OPTION PLAN 1. PURPOSE The purpose of this 1994 Directors' Stock Option Plan (the "Plan") of Varco International, Inc. (the "Company") is to advance the interests of the Company and its shareholders by enabling the Company to attract and retain highly qualified directors who are not also employees of the Company or any of its subsidiaries and by encouraging increased ownership of shares of the Common Stock of the Company (the "Common Stock") by such directors. 2. ADMINISTRATION The Plan shall be administered by a committee (the "Committee") appointed by the Board of Directors of the Company (the "Board"), which shall consist of not less than three directors of the Company. The Board may designate its Compensation Committee, if any, as the Committee. The Committee is authorized to interpret the Plan and may from time to time adopt such rules and regulations, not inconsistent with the provisions of the Plan, as it may deem advisable. Notwithstanding the foregoing, the Plan is intended to meet the requirements of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act") and, more specifically, to meet the criteria for a plan providing for "formula awards" set forth in Rule 16b-3(c)(2)(ii) or any successor rule or regulation, and, accordingly, the Committee shall have no discretion with respect to the eligibility or selection of directors to be granted options ("Options") under the Plan, the timing of the grant of any Option, the number of Shares subject any Option or the exercise price thereof, or any other matter or determination which would cause the Plan not to meet such criteria. Decisions of the Committee shall be final and binding upon all parties having an interest in the Plan. 3. PARTICIPATION All directors of the Company who are not employees of the Company or any subsidiary of the Company ("Eligible Directors") shall be eligible to participate in the Plan. As used herein, "subsidiary" shall mean any corporation at least 50% of the outstanding voting stock of which is owned, directly or indirectly through one or more intermediaries, by the Company. 4. COMMON STOCK SUBJECT TO THE PLAN Subject to adjustment as provided in Section 7 of the Plan, the maximum number of shares of Common Stock which may be issued upon the exercise of Options shall be 650,000. Such shares shall be authorized but unissued shares. If any Option shall expire or terminate for any reason without having been exercised in full, the unpurchased shares which were subject thereto shall again become available for issuance under the Plan. 5. GRANTS OF OPTIONS (a) Initial Grants. There shall be granted to each Eligible Director (i) on the date of his or her initial election as a member of the Board in the case of each Eligible Director who was not a member of the Board of Directors on the date the Plan was approved by the Board (the "Board Approval Date"), (ii) on the Board Approval Date in the case of each Eligible Director who is a member of the Board on the Board Approval Date, and (iii) on the date a person becomes an Eligible Director by virtue of the termination of his or her employment by the Company or any subsidiary of the Company in the case of each Eligible Director who was not an Eligible Director on the date of his or her initial election as a member of the Board or on the Board Approval Date, an Option to purchase 5,000 shares of Common Stock. (b) Annual Grants. There shall be granted to each Eligible Director annually on the second Thursday of August in each year, commencing with the year 1995 and to an including the year 2003, an Option to purchase 5,000 shares of Common Stock ("Annual Grant Option"). (c) Election. Any Eligible Director may elect not to receive an Annual Grant Option, but only by written notice delivered to the Committee not less than six months prior to the date of grant of such Option. (d) Adjustments. The number of shares subject to any outstanding Option and the number of shares subject to any Option to be granted under this Section 5 shall be subject to adjustment from time to time as provided in Section 7 of the Plan. (e) No Limitation on Removal. No Option granted under this Section 5 shall be construed as limiting any right which either the shareholders of the Company or the Board may have to remove at any time, with or without cause, any Eligible Director from the Board. 6. TERMS AND CONDITIONS OF OPTIONS Each Option shall be evidenced by a written instrument in substantially the form of Exhibit 1 attached hereto or in such other form as may be approved by the Committee and shall be subject to the following terms and conditions: 2 (a) Term. The term of each Option shall be ten years from its date of grant, subject to earlier termination in accordance with Section 7(b) of the Plan or as follows: (i) If any Eligible Director shall cease to be an Eligible Director for any reason other than his or her death or disability (within the meaning of Section 422(c)(6) of the Internal Revenue Code of 1986, as amended (the "Code")) while holding an Option which has not expired and has not been fully exercised, such holder may exercise such Option to the extent that it was exercisable at the time he or she ceased to be an Eligible Director at any time within three months after the date on which such holder ceased to be an Eligible Director, but in no event later than ten years from the date such Option was granted. Such Option shall terminate upon the expiration of such period unless the holder dies prior to such expiration, in which event he or she shall be deemed to have died on the date he or she ceased to be an Eligible Director, and such Option be exercisable and terminate in accordance with the provisions of paragraph (ii) below. (ii) If any Eligible Director shall cease to be an Eligible Director by reason of his or her death or disability (within the meaning of Section 422(c)(6) of the Code), while holding an Option which has not expired and has not been fully exercised, such holder (or his or her guardian or legal representative) may exercise such Option to the extent that it was exercisable at the time he or she ceased to be an Eligible Director by reason of such death or disability at any time within twelve months after the date on which such person ceased to be an Eligible Director, but in no even later than ten years from the date such Option was granted. Such Option shall terminate upon the expiration of such period. (b) Exercise Price. The purchase price for each share of Common Stock subject to an Option shall be equal to 100% of the Fair Market Value (as hereinafter defined) of the Common Stock on the date such Option is granted. As used in the Plan, "Fair Market Value" on any date shall be equal to the mean of the high and low sales prices of a share of Common Stock on such date (or if such date is not a trading day or there are no sales reported on such date, on the next preceding trading day for which sales are reported), based on the composite or consolidated transactions for New York Stock Exchange issues reported by The Wall Street Journal (or if The Wall Street Journal is not then being published, by The New York Times or such other source as shall be determined by the Committee.) In the event that the Common Stock ceases to be listed on the New York Stock Exchange, the method of determining Fair Market Value shall be 3 determined by the Committee. The exercise price of outstanding Options shall be subject to adjustment from time to time in accordance with Section 7 of the Plan. (c) Exercisability. Each Option shall become exercisable with respect to 50% of the shares subject thereto on the first anniversary of the date of grant of such Option and with respect to the remaining 50% on the second anniversary of such date of grant, provided that the holder is an Eligible Director on the applicable anniversary date. Notwithstanding the foregoing, in the event that (i) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the 1934 Act, acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding Common Stock or (ii) as a result of or in connection with a contested election of directors, the persons who were directors of the Company before such election shall cease to constitute a majority of the Board of Directors of the Company, then immediately upon the occurrence of any such event (a "Change in Control") each outstanding Option shall become exercisable with respect to all shares subject thereto. Options shall also become exercisable pursuant to the provisions of Section 7(b) of the Plan. (d) Exercise and Payment. An Option may be exercised only by written notice to the Company at its principal executive office by the person entitled to exercise such Option, stating the number of shares of Common Stock with respect to which such Option is being exercised and accompanied by payment of the full purchase price for the shares with respect to which it is exercised. The minimum number of shares of Common Stock with respect to which an Option may be exercised at any one time shall be 500, unless the number of shares with respect to which the Option is being exercised is the total number of shares available for purchase under the Option. The purchase price may be paid in cash, in shares of Common Stock owned by the Holder, or partly in cash and partly in shares of Common Stock. The value of shares of Common Stock delivered in payment of the purchase price shall be their Fair Market Value, as of the date of exercise. Upon receipt of such notice and payment and payment of any amount on account of withholding taxes as provided in paragraph (e) below, the Company shall promptly issue and deliver to the holder (or other person entitled to exercise the Option) a certificate or certificates for the number of shares of Common Stock as to which the exercise is made. No holder of an Option shall have any rights as an owner of Common Stock until the date of issuance to him or her of such certificate or certificates. (e) Withholding Taxes. It shall be a condition to the obligation of the Company to issue shares of Common Stock upon the exercise of an Option, that the holder pay to the Company the amount requested by the Company for the purpose of satisfying any liability to withhold federal, state, local or foreign income or other taxes. 4 (f) Transferability. No Option shall be transferable by the holder thereof otherwise than by will or the laws of descent and distribution and any such Option shall be exercisable during the holder's lifetime only by him or her, or in the event of disability, by his or her guardian or legal representative. (g) Nonstatutory Options. Each Option shall be a nonstatutory option not intended to qualify as an incentive stock option under Section 422 of the Code. (g) Compliance with Law. The exercise of each Option shall be on the condition that the purchase of shares of Common Stock thereunder shall be for investment purposes, and not with a view to resale or distribution unless such shares are registered under the Securities Act of 1933, as amended, or if in the opinion of counsel for the Company such registration is not required under such Act, or any other applicable law, rule or regulation. 7. ADJUSTMENTS (a) In the event of any change in the outstanding Common Stock by reason of stock dividends, split-ups, consolidations, recapitalizations, reorganizations or like events (as determined by the Committee), an appropriate and proportionate adjustment shall be made by the Committee in the number of shares available for issuance under the Plan, in the number of shares of Common Stock to be subject to Options to be granted under Section 5 of the Plan, and in the number of shares subject to, and the exercise price of shares of Common Stock subject to Options outstanding under the Plan with respect to any unpurchased shares. Any such adjustment to an outstanding Option shall be made without a change in the total exercise price applicable to such unpurchased shares but with a corresponding adjustment in the per share exercise price. No fractional shares of Common Stock shall be issued under the Plan on account of any adjustment under this Section 7(a). (b) Notwithstanding anything in paragraph (a) above to the contrary, in the event of any merger, consolidation or other reorganization of the Company in which the Company is not the surviving or continuing corporation (as determined by the Committee) or in the event of the liquidation or dissolution of the Company, all Options shall terminate on the effective date of the merger, consolidation, reorganization, liquidation or dissolution unless, in the case of a merger, consolidation or reorganization, the agreement with respect thereto provides otherwise. Notwithstanding any other provision of the Plan to the contrary, all outstanding Options shall be exercisable with respect to all shares subject thereto for a period of 30 days prior to the effective date of any such merger, consolidation, reorganization, liquidation or dissolution unless, in the case of a merger, consolidation or reorganization, such Options are assumed by the continuing or surviving corporation. 5 8. AMENDMENT The Plan may be amended at any time and from time to time by the Board, provided, however, that shareholder approval shall be required for any amendment materially increasing the benefits accruing to participants under the Plan, materially increasing the number of shares of Common Stock which may be issued under the Plan (except as permitted by Section 7 of the Plan) or materially modifying the requirements as to eligibility for participation in the Plan and provided, further, that the Plan may not be amended more than once every six months other than to comply with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. No amendment to the Plan shall impair the rights of a holder of an Option granted prior to its adoption without such holder's consent. 9. REGULATORY REQUIREMENTS (a) The Company may require that any holder, as a condition of the exercise of any Option, to represent and establish to the satisfaction of the Company that all shares of Common Stock acquired upon the exercise of such Option will be acquired for investment and not with a view to resale or distribution. The Company may prevent the sale or other disposition of any shares acquired pursuant to the exercise of an Option until it is satisfied that such sale or other disposition would not be in contravention of applicable state or Federal securities laws. (b) No Option shall be exercisable in whole or in part at any time the Board shall determine in its discretion that the listing or qualification of the shares of Common Stock subject to such Option on any securities exchange or under any applicable law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the exercise of such Option or the issuance of shares of Common Stock thereunder, unless such listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board. 10. TERMINATION The Plan shall terminate upon the earlier of the adoption by the Board of a resolution terminating the Plan or ten years from the Board Approval Date. The termination of the Plan shall not affect the validity of any Option outstanding under the Plan at the date of termination, but no Option shall be granted under the Plan subsequent to its termination. 6 11. STOCKHOLDER APPROVAL The Plan shall become effective upon its adoption by the Board, subject to approval by the shareholders of the Company on or before July 31, 1995, by the affirmative vote of the holders of a majority of the shares of Common Stock of the Company present, or represented and entitled to vote, at a meeting duly held in accordance with the laws of the State of California. In the event such approval is not obtained, all Options granted under the Plan shall be void and without effect, and no additional Options shall be granted under the Plan. 7 EXHIBIT 1 VARCO INTERNATIONAL, INC. DIRECTOR STOCK OPTION VARCO INTERNATIONAL, INC., a California corporation, hereby grants to _______________________ (the "Holder") a stock option pursuant and subject to the terms and conditions of the 1994 Directors' Stock Option Plan (the "Plan") of the Company and upon the terms and conditions set forth below. Capitalized terms used and not otherwise defined in this Option shall have the respective meanings set forth in the Plan. 1. STOCK OPTION. The Company grants to the Holder the right and option to purchase from the Company an aggregate of _____ shares of Common Stock of the Company at an exercise price of $______ per share. This Option shall become exercisable with respect to _____ shares on _________________, and with respect to the remaining _____ shares on _________________, provided that the Holder is an Eligible Director on the applicable date. Notwithstanding the foregoing, this Option shall become exercisable with respect to all shares of Common Stock subject hereto immediately upon the occurrence of a Change in Control and shall become exercisable with respect to all such shares in certain events in accordance with the provisions of Section 7(b) of the Plan. This Option shall be a nonstatutory option not intended to qualify as an incentive stock option under Section 422 of the Code. 2. TERM. The term of this Option is ten years commencing on _________________ and ending on _________________, subject to earlier termination in accordance with Section 7(b) of the Plan or as follows: (a) If the Holder shall cease to be an Eligible Director for any reason other than his or her death or disability (within the meaning of Section 422(c)(6) of the Code), prior to the expiration of this Option, the Holder may exercise this Option to the extent that it was exercisable at the time he or she ceased to be an Eligible Director at any time within three months after the date on which he or she ceased to be an Eligible Director, but in no event later than _________________. This Option shall terminate upon the expiration of such period unless the Holder dies prior to such expiration, in which event he or she shall be deemed to have died on the date he or she ceased to be an Eligible Director, and this Option be exercisable and terminate in accordance with the provisions of paragraph (b) below. (ii) If the Holder shall cease to be an Eligible Director by reason of his or her death or disability (within the meaning of Section 422(c)(6) of the Code), prior to the expiration of this Option, the Holder (or his or her guardian or legal representative) may exercise this Option to the extent that it was exercisable at the time he or she ceased to be an Eligible Director by reason of such death or disability at any time within twelve months after the date on which he or she ceased to be an Eligible Director, but in no even later than _________________. This Option shall terminate upon the expiration of such period. 3. EXERCISE AND PAYMENT. This Option may only be exercised by written notice to the Company at its principal executive office by the person entitled to exercise this Option, stating the number of shares of Common Stock with respect to which it is being exercised (which shall be not less than 500 shares unless this Option is being exercised with respect to the total number of shares available for purchase hereunder) and accompanied by payment of the full purchase price for the shares with respect to which this Option is being exercised. The purchase price may be paid in cash, in shares of Common Stock owned by the Holder, valued at their Fair Market Value on the date of exercise, determined as provided in the Plan, or partly in cash and partly in shares of Common Stock. It shall be a condition to the exercise of this Option that the Holder pay to the Company the amount requested by the Company for the purpose of satisfying any liability to withhold federal, state, local or foreign income or other taxes. The Holder shall not have any rights as an owner of Common Stock by reason of the exercise of this Option until the date of issuance to him or her of a certificate or certificates representing the shares of Common Stock purchased. 4. ADJUSTMENTS. The number of shares of Common Stock subject to this Option and the exercise price is subject to adjustment as provided in Section 7 of the Plan. 5. TRANSFERABILITY. This Option may not be transferred by the Holder otherwise than by will or the laws of descent and distribution and during the Holder's lifetime shall be exercisable only by him or her, or in the event of disability, by his or her guardian or legal representative. 6. COMPLIANCE WITH LAW. The exercise of this Option shall be on the condition that the purchase of shares of Common Stock hereunder shall be for investment purposes, and not with a view to resale or distribution unless such shares are registered under the Securities Act of 1933, as amended, or if in the opinion of counsel for the Company such registration is not required under such Act, or any other applicable law, rule or regulation. 2 9. REGULATORY REQUIREMENTS. (a) The Company may require that the Holder, as a condition of any exercise of this Option, represent and establish to the satisfaction of the Company that all shares of Common Stock to be acquired upon such exercise will be acquired for investment and not with a view to resale or distribution. The Company may prevent the sale or other disposition of any shares acquired pursuant to any exercise of this Option until it is satisfied that such sale or other disposition would not be in contravention of applicable state or Federal securities laws. (b) This Option shall not be exercisable in whole or in part at any time the Board shall determine in its discretion that the listing or qualification of the shares of Common Stock subject hereto on any securities exchange or under any applicable law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the exercise of this Option or the issuance of shares of Common Stock hereunder, unless such listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board. 10. CONFLICT. In the event of any conflict between the terms and provisions of this Option and the terms and provisions of the Plan, the terms and provisions of the Plan shall govern. 11. GOVERNING LAW. This Option shall be governed by and interpreted in accordance with the laws of the State of California. VARCO INTERNATIONAL, INC. BY_____________________________ Title: Dated: _________________ 45684.2 3 EX-11 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 VARCO INTERNATIONAL, INC. Statement Re Computation of Per Share Earnings
Three Months Ended Twelve Months Ended December 31 1995 December 31 1995 -------------------------------------- A. CALCULATION OF ADJUSTED EARNINGS Net Income After Tax $2,442,000 $14,439,000 Total Number Average Number Stock Option Shares Used Number of of Shares after of Shares Equivalent To Calculate Days Weighing Outstanding Shares EPS --------------------------------------------------------------------------------- B. CALCULATION OF AVERAGE SHARES OUTSTANDING Common Stock Outstanding from time-to-time during: Three Months Ended December 31, 1995 92 2,786,202,550 30,284,810 479,508 30,764,318 Twelve Months Ended December 31, 1995 365 11,406,218,975 31,249,915 479,508 31,729,423 C. CALCULATION OF EARNINGS PER SHARE Income Per Share = Net Income After Tax ------------------------ Total Shares Outstanding Income Per Share = Three Months Ended December 31, 1995 2,442,000 = $0.08 ----------- 30,764,318 Three Months Ended December 31, 1995 14,439,000 = $0.46 ----------- 31,729,423
EX-12 12 STATEMENT RE COMPUTATIONS OF RATIOS EXHIBIT 12 VARCO INTERNATIONAL, INC. STATEMENT RE COMPUTATIONS OF RATIOS ($000'S)
Ratio of Earnings to Fixed Charges 1995 1994 1993 - ---------------------------------- ------- ------- ------- Earnings: Pretax Income $21,908 $18,917 $10,811 Plus: Interest Expense 4,326 4,766 5,010 Amortization of Debt Issuance Costs 190 185 260 ------------------------------- Total $26,424 $23,868 $16,081 =============================== Fixed Charges: Interest Expense $ 4,326 $ 4,766 $ 5,010 Amortization of Debt Issuance Costs 190 185 260 ------------------------------- Total $ 4,516 $ 4,951 $ 5,270 =============================== Ratio of Earnings to Fixed Charges 5.85 4.82 3.05
EX-13 13 SELECTED PAGES FROM 1995 ANNUAL REPORT EXHIBIT 13 STOCK INFORMATION PRICE RANGE OF VARCO COMMON STOCK The following table sets forth for the periods indicated the high and low sale prices per share of Common Stock reported by the New York Stock Exchange. There were 1,755 holders of record of the Common Stock as of the close of business on March 1, 1996.
High Low High Low ----------------------------------- -------------------------------- 1995 1994 FIRST QUARTER 7 3/4 6 FIRST QUARTER 7 5 1/4 SECOND QUARTER 9 1/2 7 5/8 SECOND QUARTER 7 5 1/8 THIRD QUARTER 11 7/8 8 1/8 THIRD QUARTER 7 3/8 5 7/8 FOURTH QUARTER 12 7/8 8 3/8 FOURTH QUARTER 7 3/8 6
DIVIDEND POLICY The payment of dividends (other than dividends payable solely in shares of Common Stock) on, and repurchases of, Common Stock are restricted by the note agreement between Varco and its institutional lenders and Varco's revolving credit agreement with two financial institutions. Under the revolving credit agreement, which is generally the more restrictive, the amount available for the payment of dividends on, and repurchases of, Common Stock is limited to 25% of Varco's consolidated net income arising after January 1, 1992, computed on a cumulative basis. At December 31, 1995, the amount available for dividends and repurchases under the credit agreement was $8,505,000. In addition, pursuant to a December 31, 1995 amendment to the Credit Agreement, the Company may repurchase at any time prior to December 31, 1996 shares of its Common Stock for an aggregate cost not exceeding $50.0 million including shares purchased pursuant to the Tender Offer. The Company may also purchase or otherwise acquire shares of Common Stock from the proceeds of the substantially concurrent sale of shares of Common Stock. The Company has not paid a dividend on the Common Stock since 1982, and the Board of Directors presently has no plans to resume the payment of dividends. ANNUAL MEETING The Varco International, Inc. 1996 Annual Meeting will be held May 16, 1996 at the Doubletree Hotel, 100 The City Drive, Orange, California. All shareholders are cordially invited to attend. ANNUAL REPORT ON FORM 10-K The Company's Annual Report on Form 10-K for the year ended December 31, 1995, as filed with the Securities and Exchange Commission, is available by writing to Donald L. Stichler, Controller-Treasurer, Varco International, Inc., 743 North Eckhoff Street, Orange, California 92668. COMMON STOCK The Company's Common Stock is traded on the New York Stock Exchange under the symbol VRC. TRANSFER AGENT & REGISTRAR Harris Trust Company of California Los Angeles, California 42 VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
FIVE-YEAR FINANCIAL AND OPERATING HIGHLIGHTS (in thousands, except per share amounts and employees) Years Ended December 31, 1995 1994/(1)/ 1993/(1)/ 1992/(1)/ 1991 - ----------------------------------------------------- ---------- ---------- --------- -------- Summary of Operations Revenues $273,731 $ 223,601 $ 193,480 $ 173,069 $216,622 Gross Profit 99,214 86,761 72,010 63,049 79,431 Research and Development 13,156 11,438 9,479 9,818 10,757 Selling, General and Administrative Expenses 61,014 53,798 48,423 49,067 47,616 Interest Expense 4,516 4,766 5,010 3,918 4,509 Income Before Income Taxes 21,908 18,917 10,811 852 16,925 Income Taxes 7,469 6,756 3,715 530 2,894 Income Before Cumulative Effect of Change in Accounting for Income Taxes/(2)/ 14,439 12,161 7,096 322 14,031 Net Income 14,439 12,161 7,096 2,358 14,031 As a Percent of Revenues 5.3% 5.4% 3.7% 1.4% 6.5% Return on Average Shareholders' Equity 9.2% 7.7% 4.8% 1.6% 11.6% Per share of common stock Income Before Cumulative Effect of Change in Accounting for Income Taxes/(2)/ .46 .36 .21 .01 .45 Net Income .46 .36 .21 .07 .45 Book Value 5.01 4.91 4.58 4.37 4.28 ======== ======== ======== ======== ======== Year-end financial position Working Capital 89,187 112,342 113,241 102,953 82,748 Current Ratio 2.5 3.4 3.9 4.1 3.3 Property and Equipment -- Net 50,622 47,659 47,241 49,797 43,018 Total Assets 246,571 257,641 248,021 232,301 204,066 Long-Term Debt 29,539 39,349 49,164 51,326 25,567 Shareholders' Equity 151,179 163,728 152,608 144,366 141,919 Long-Term Debt as Percent of Total Capitalization 16.3% 19.4% 24.4% 26.2% 15.3% ======== ======== ======== ======== ======== Other Capital Expenditures 13,256 8,588 4,029 4,577 7,850 Depreciation and Amortization 12,347 10,996 10,687 10,964 9,943 Number of Employees 1,636 1,410 1,261 1,198 1,310 Average Shares used in Computing Earnings Per Share 31,729 33,522 33,400 32,996 31,161 ======== ======== ======== ======== ========
(1) Includes the acquisitions of Shaffer as of July 17, 1992; Metrox as of August 17, 1993 and Rig Technology Limited as of November 30, 1994. (2) 1992 Cumulative effect of adopting Statement of Financial Accounting Standards No. 109. See notes to consolidated financial statements. 20 VARCO INTERNATIONAL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND The business of the Company depends primarily upon the level of worldwide drilling activity, particularly offshore drilling activity. The level of drilling activity can be influenced by numerous factors, including economic and political conditions, the prices of oil and gas, development of alternative energy sources, availability of equipment and materials, availability of new onshore and offshore acreage or concessions, and new and continued governmental regulations regarding environmental protection, taxation, price controls and product allocations. The price of oil has averaged approximately $18.30, $17.20 and $18.40 a barrel for 1993, 1994 and 1995, respectively. Oil prices dropped to less than $15 in December 1993 and remained low through the first quarter of 1994. The price of oil increased in the second quarter of 1994 and has been relatively stable since, averaging approximately $18.40 for the balance of 1994 and 1995. The price of natural gas has averaged approximately $2.00, $1.70 and $1.45 per thousand cubic feet for 1993, 1994 and 1995, respectively. The price of natural gas was weak during the first three quarters of 1995, averaging approximately $1.40. During the fourth quarter of 1995 gas prices increased, averaging $1.80, the highest level since the first quarter of 1994. Rig counts, as reported by industry sources, for each of the past three years are summarized in the following table: 1995 1994 1993 ------------------------------------------------------- ----- ----- [S] [C] [C] [C] Approximate Average Annual Rig Count: Worldwide average rig count 1,712 1,766 1,711 United States & Canada average rig count 953 1,033 938 International average rig count 759 733 773 Approximate average number of offshore rigs under contract 542 535 551 Overall drilling activity, as reflected by the average number of rigs drilling worldwide, was little changed from 1994. The U.S. rig count fell approximately 7%, while international activity was up slightly more than 3%. Offshore drilling, however, was surprisingly strong, particularly in the second half of the year. The 1995 worldwide utilization of offshore rigs (rigs under contract as a percent of available rigs) reached its highest level since 1982 (utilization rates were 84.3%, 80.9% and 83.1% for the years 1995, 1994 and 1993 respectively), driven both by increased demand and a continual shrinking supply of available rigs. The higher utilization was accompanied by increasing day rates and longer contract periods, particularly among the "premium" offshore rigs. This resulted in increased cash flow for the Company's major customers, the drilling contractors. ACQUISITIONS On November 30, 1994 the Company acquired all of the outstanding shares of Rig Technology Limited ("Thule Rigtech"), a company incorporated in Scotland, for a cost of approximately $9.0 million. Thule Rigtech provides equipment and systems used in the handling, mixing, transport and conditioning of drilling fluids and operates as the Company's Thule Rigtech Division. On August 17, 1993 the Company acquired all of the outstanding common stock of Metrox, Inc. for a cash consideration of approximately $4.0 million. Metrox designed and manufactured instrumentation used in the oil and gas industry, as well as in general commercial and industrial applications. Metrox has been combined with, and is reported within, the Company's Martin-Decker/TOTCO Instrumentation Division. 22 VARCO INTERNATIONAL, INC. AND SUBSIDIARIES For further information concerning these acquisitions see Note L of Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS The Company operates principally in the oil and gas well drilling equipment segment of the oilfield service industry. Set forth below are the annual net orders for the Company's five divisions which serve this segment.
(in thousands) 1995 1994 1993 - ------------------------------------------------------- -------- -------- Net Orders Varco Drilling Systems $ 95,519 $ 98,044 $ 52,000 Varco BJ Oil Tools 42,252 41,201 38,279 Martin-Decker/TOTCO Instrumentation 57,967 54,341 46,171 Shaffer 88,961 46,708 46,623 Thule Rigtech 10,242 1,191 -------- -------- -------- Total $294,941 $241,485 $183,073 ======== ======== ========
Order bookings increased $53.5 million, 22%, in 1995 as compared to 1994. Most of the increase occurred at the Shaffer Division and included orders to upgrade several offshore rigs (primarily semisubmersible rigs used in deepwater drilling) with pressure control, motion compensation and related equipment. Secondarily, the increase from 1994 was due to the full year impact of Thule Rigtech and increased orders for the TOTAL product line of Martin-Decker/TOTCO. During 1995 the Drilling Systems Division experienced a shift in orders as compared to the previous year. Orders for Top Drive Drilling Systems ("TDS") totaled 37 units, which included orders for 9 TDS-9S units (a new TDS product designed primarily for conventional land rigs), as compared to 53 unit orders in 1994. However, largely offsetting this decline were orders for pipe handling systems which totaled $22.3 million in 1995, an increase from $11.7 million in the prior year. Order bookings in the fourth quarter of 1995 were $85.6 million as compared to an average of $69.8 million for the first three quarters of the year. Virtually all of this increase is attributable to the Shaffer Division, and is a result of the semisubmersible rig upgrades discussed above. In 1994 orders increased $58.4 million, 32%, as compared to 1993. The increase occurred primarily at the Drilling Systems Division and resulted from an increase in TDS unit orders to 53, from 21 in 1993, together with an increase in pipe handling systems orders to $11.7 million, from $2.9 million in the prior year. Additionally, Martin-Decker/TOTCO experienced an $8.2 million increase, primarily as a result of the factors described in the revenue discussion below. Set forth below are the annual revenues for the Company's five divisions.
(in thousands) 1995 1994 1993 - -------------------------------------------------------------- -------- -------- Revenues Varco Drilling Systems $101,440 $ 74,405 $ 58,703 Varco BJ Oil Tools 41,663 41,309 40,157 Martin-Decker/TOTCO Instrumentation 58,013 54,176 44,738 Shaffer 60,925 50,900 48,169 Thule Rigtech 10,310 653 -------- -------- -------- Total $272,351 $221,443 $191,767 ======== ======== ========
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES 23 The Company's Revenues increased by 23% in 1995, to $272.4 million, from $221.4 million in the prior year. The increase was concentrated in the Drilling Systems and Shaffer Divisions, along with the full year impact of Thule Rigtech. TDS unit shipments increased to 48, including 8 TDS-9S units, from 41 in 1994; and pipe handling systems revenues totaled $17.8 million in 1995 versus $3.6 million in 1994. The year-to-year increase at Shaffer resulted primarily from the upgrading of offshore rigs with pressure control and motion compensation equipment. The growth in Revenue in 1994 as compared to 1993 was concentrated in the Drilling Systems and Martin-Decker/TOTCO Divisions. Drilling Systems' increase resulted primarily from the delivery of 41 TDS units, versus 22 in the prior twelve months. The increase in Martin-Decker/TOTCO's revenues resulted from: an increase of $5.7 million in international product sales, primarily the TOTAL System; $2.0 million from the full year effect of the Metrox acquisition; and $2.5 million in increased rental revenue due to higher North American drilling activity. The Company's backlog of unshipped orders was $75.4 million at December 31, 1995 as compared to $52.8 million at December 31, 1994 and $32.3 million at December 31, 1993. In accordance with industry practice, orders and commitments generally are cancelable by customers at any time. The Company believes that substantially all of the backlog at December 31, 1995 will be shipped by December 31, 1996. Other income decreased in 1995 as compared to 1994 and 1993, due to a decline in investment earnings as the Company used approximately $29.6 million of cash and cash equivalents and short-term investments to repurchase approximately 3.5 million shares of the Company's common stock. Gross margins (net sales and rental income less costs of sales and rental income) as a percentage of net sales and rental income for the Company were 36.4% for 1995, 39.2% for 1994 and 37.6% for 1993. Approximately 2.3% of the 2.8% margin decline in 1995 as compared to 1994 is due to lower margins on Drilling Systems' newer products. This decline is due to a slightly negative margin on TDS-9S units ($5.1 million in revenue) and to lower than average margins on newer pipe handling products. The balance of the margin decline is primarily due to general cost increases at all divisions, such as labor and material costs. These cost increases were partially offset by a favorable impact on gross margins of 1.0% resulting from increased utilization of the Company's manufacturing facilities, from 75% in 1994 to approximately 90% in 1995. The gross margin improvement in 1994 over 1993 is due to increased utilization of the Company's manufacturing facilities. The Company estimates that based upon direct labor hours and a two shift operation, its manufacturing facilities were approximately 75% utilized in 1994 as compared to 60% during 1993. The effect of this higher utilization has been to increase the percentage of manufacturing expenses allocated to inventory and decrease expenses charged directly to cost of sales, thereby contributing to an increase in gross margins. The Company believes that new product development is significant to the future growth of the Company. Research and development expenses as a percent of revenue were 4.8%, 5.1%, and 4.9% for the years 1995, 1994 and 1993 respectively. The Company expects to continue to incur research and development expenses at similar rates. Selling, general and administrative expenses were $61.0 million in 1995 (22.3% of revenues), $7.2 million higher than the $53.8 million (24.1% of revenue) in 1994. This increase is primarily due to selling and marketing expenses associated with the higher revenue levels in 1995 and to the full year impact of Thule Rigtech. Selling, general and administrative expenses were $53.8 million in 1994, $5.4 million higher than in 1993. This increase is primarily due to selling and marketing expenses associated with the higher revenue levels in 1994. 24 VARCO INTERNATIONAL, INC. AND SUBSIDIARIES At December 31, 1995 overall Company employment was 1,636 (including 221 temporary employees) as compared to 1,410 (including 179 temporary employees) at December 31, 1994. The employment increase is mostly due to an increase in manufacturing employees to meet the higher level of shipments. The Company's effective income tax rate was 34.1% in 1995 compared to 35.7% in 1994. This decline is primarily due to lower foreign taxes as a result of recording a credit for a foreign tax loss carryforward. The Company's effective income tax rate was 35.7% in 1994 compared to 34.4% in 1993. The increase is due to the utilization of $1.7 million of U.S. tax credits in 1993 compared to only $1.3 million of such credits in 1994. At December 31, 1995 the Company had no further U.S. tax credits to offset against future taxes. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1995 the Company had cash and cash equivalents of $6.8 million as compared to $38.6 million of cash and cash equivalents and short-term investments at December 31, 1994. This decline is due to the Tender Offer and the Senior Note payment, discussed below. On March 24, 1995, the Company commenced a "Dutch Auction" type tender offer (the "Tender Offer") to purchase up to 5,300,000 shares of its Common Stock at a purchase price not greater than $8.00 per share nor less than $6.75 per share. Pursuant to the Tender Offer, which terminated on April 21, 1995, the Company purchased 3,150,560 shares of its Common Stock at a purchase price of $8.00 per share. The aggregate cost to the Company of the Tender Offer, including expenses, was approximately $26.2 million, which was funded from cash and cash equivalents and short-term investments. In July 1992 the Company sold $50.0 million aggregate principal amount of its 8.95% Senior Notes Due June 30, 1999 (the "Senior Notes") to a group of ten institutional investors pursuant to a Note Agreement dated as of July 1, 1992 (the "Note Agreement"). The principal of the Senior Notes is payable in five equal annual installments of $10.0 million, the first of which was made on June 30, 1995. Effective as of March 8, 1995, the holders of the Senior Notes waived compliance with certain covenants contained in the Note Agreement in order to permit the Tender Offer and amended certain financial covenants to take into account the effect of the consummation of the Tender Offer. The Senior Notes include a yield maintenance prepayment penalty if any principal is repaid prior to the installment due date. Had the entire outstanding principal amount been prepaid at December 31, 1995 the prepayment penalty would have been approximately $2.1 million. On February 25, 1993 the Company entered into an unsecured revolving credit agreement with Citicorp USA, Inc. and Citibank, N.A. (the "Credit Agreement"). Effective as of March 17, 1995 the Credit Agreement was amended to (1) extend the maturity date from March 31, 1996 to October 31, 1998; (2) increase the total maximum facility from $20.0 to $35.0 million, consisting of a loan facility of $25.0 million and a letter of credit facility of $10.0 million; and (3) to amend certain covenants to permit the Tender Offer and to take into account the effect of the consummation of the Tender Offer on certain financial ratios. At December 31, 1995 there were no advances outstanding and $3.8 million in letters of credit outstanding under this facility. Both the Note Agreement and the Credit Agreement restrict the payment of dividends (other than dividends payable solely in shares of Common Stock) on, and repurchases of, Common Stock. Under the terms of the Credit Agreement, which is generally the more restrictive of these, the amount available for the payment of dividends on, and repurchases of, Common Stock is limited to 25% of the Company's consolidated net income arising after January 1, 1992, computed on a cumulative basis. In addition, pursuant to a December 31, 1995 amendment VARCO INTERNATIONAL, INC. AND SUBSIDIARIES 25 to the Credit Agreement, the Company may repurchase at any time prior to December 31, 1996 shares of its Common Stock for an aggregate cost not exceeding $50.0 million including shares purchased pursuant to the Tender Offer. The Company may also purchase or otherwise acquire shares of Common Stock from the proceeds of the substantially concurrent sale of shares of Common Stock. On May 26, 1994 the Company announced that its Board of Directors authorized the repurchase of up to one million shares of the Company's Common Stock for an aggregate purchase price not exceeding $6.0 million (the "Repurchase Program"). On May 26, 1995 the Company announced an increase and extension of the above Repurchase Program. The total number of shares authorized for repurchase was increased to 1,500,000; the maximum aggregate purchase price was increased to $11.0 million and the purchase period was extended through December 31, 1996. To date the Company has repurchased on the open market 627,600 shares of its Common Stock at an average price of approximately $8.00 per share. The last such purchase was on December 6, 1995. Working capital was $89.2 million at December 31, 1995 compared to $112.3 million at December 31, 1994. The Company's current ratio has decreased from 3.4 to 1.0 at December 31, 1994 to 2.5 to 1.0 at December 31, 1995 and long-term debt as a percentage of total capitalization has decreased to 16% at December 31, 1995 from 19% at December 31, 1994. The decrease in working capital and current ratio is due to the completion of the Tender Offer. The decline in long-term debt as a percent of total capitalization is due to the June 30 principal payment made on the Senior Notes. Capital expenditures were $13.3 million in 1995 as compared to $8.6 million in 1994. The Company expects 1996 expenditures will be at a level comparable to the 1995 amount. The major capital expenditures in 1995 included $3.6 million for the purchase of Martin-Decker/TOTCO's manufacturing facility which was previously leased, $7.6 million of machinery and equipment and $2.1 million of rental assets at Martin-Decker/TOTCO. The Company believes its December 31, 1995 cash and cash equivalents and its credit facility will be sufficient to meet its capital expenditures and operating cash needs and the principal payment on the Senior Notes in 1996. 26 VARCO INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
($ in thousands) December 31, 1995 1994 - ---------------------------------------------------------------------------------------- -------- ASSETS Current Assets Cash and cash equivalents $ 6,762 $ 8,793 Short-term investments--Note B 29,832 Receivables -- principally trade, less allowances for doubtful accounts of $1,585 (1995) and $1,580 (1994) 60,683 52,250 Inventories -- Note C 70,832 60,299 Deferred tax assets -- Note E 5,130 5,068 Prepaid expenses 3,533 2,535 -------- -------- Total Current Assets 146,940 158,777 Property, plant and equipment -- at cost, less accumulated depreciation -- Note D 50,622 47,659 Cost in excess of net assets acquired, less accumulated amortization of $5,331 (1995) and $4,210 (1994) 36,371 37,529 Other assets -- Note C 12,638 13,676 -------- -------- Total Assets $246,571 $257,641 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable -- principally trade $ 21,356 $ 15,345 Accrued payroll and related costs 7,299 7,258 Accrued warranty 2,637 2,563 Taxes payable 1,885 1,152 Other accrued liabilities 14,576 10,117 Current portion of long-term debt -- Note F 10,000 10,000 -------- -------- Total Current Liabilities 57,753 46,435 Long-term debt, less current portion -- Note F 29,539 39,349 Postretirement obligations -- Note I 5,647 4,779 Other non-current liabilities--Note E 2,453 3,350 -------- -------- Total Liabilities 95,392 93,913 Shareholders' equity -- Note G Preferred Stock: 10,000,000 shares authorized, none issued and outstanding Common Stock: 80,000,000 shares authorized, 30,161,365 (1995) and 33,335,553 (1994) issued and outstanding, stated value 20,529 23,704 Additional paid-in capital 104,023 102,193 Retained earnings 26,627 37,831 -------- -------- Total Shareholders' Equity 151,179 163,728 Commitments and contingencies-- Note H Total Liabilities and Shareholders' Equity $246,571 $257,641 ======== ======== See notes to consolidated financial statements.
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES 27 CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Year Ended December 31, 1995 1994 1993 - ------------------------------------------------------------- --------- -------- Revenues Net sales $247,114 $197,956 $171,812 Rental income 25,237 23,487 19,955 Other income 1,380 2,158 1,713 -------- -------- -------- 273,731 223,601 193,480 Costs and expenses Cost of sales 165,835 127,752 114,000 Cost of rental income 7,302 6,930 5,757 Selling, general and administrative expenses 61,014 53,798 48,423 Research and development costs 13,156 11,438 9,479 Interest expense 4,516 4,766 5,010 -------- -------- -------- 251,823 204,684 182,669 -------- -------- -------- Income before income taxes 21,908 18,917 10,811 Income taxes -- Note E 7,469 6,756 3,715 -------- -------- -------- Net income $ 14,439 $ 12,161 $ 7,096 ======== ======== ======== Net income per share $.46 $.36 $.21 ======== ======== ========
See notes to consolidated financial statements. 28 VARCO INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands) Common Stock ---------------------- Additional Year Ended December 31, Issued and Outstanding Paid-in Retained 1995, 1994 and 1993 Shares Amount Capital Earnings Total - ------------------------------------------------------- ---------- ----------- --------- ---------- Balances at December 31, 1992 33,053 23,421 101,735 19,210 144,366 Net income 7,096 7,096 Common Stock issuances 251 251 895 1,146 --------- ---------- ----------- --------- ---------- Balances at December 31, 1993 34,304 23,672 102,630 26,306 152,608 Net income 12,161 12,161 Common Stock repurchased (264) (264) (1,395) (1,659) Common Stock issuances 296 296 958 1,254 Unrealized losses on investments (462) (462) Foreign currency translation adjustment (174) (174) --------- -------- --------- -------- --------- Balances at December 31, 1994 33,336 23,704 102,193 37,831 163,728 ========= ======== ========= ======== ========= Net income 14,439 14,439 Common Stock issuances 339 339 1,830 2,169 Common Stock repurchased (363) (363) (3,020) (3,383) Self tender (3,151) (3,151) (23,025) (26,176) Unrealized gains on investments 462 462 Foreign currency translation adjustment (60) (60) --------- -------- --------- -------- --------- Balances at December 31, 1995 30,161 20,529 104,023 26,627 151,179 ========= ======== ========= ======== =========
See notes to consolidated financial statements. VARCO INTERNATIONAL, INC. AND SUBSIDIARIES 29 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Year Ended December 31, 1995 1994 1993 - ----------------------------------------------------------------------------- -------- -------- Operating Activities Net income $ 14,439 $ 12,161 $ 7,096 Items included in net income not requiring (providing) cash: Depreciation 9,557 8,250 8,137 Write down of production facility to net realizable value 240 340 345 Amortization 2,790 2,746 2,550 Deferred income taxes (1,802) (517) (519) (Gain) loss on sale of equipment (101) (44) (1) Stock bonus 334 261 Post retirement obligations 868 1,174 3,605 Changes in operating assets and liabilities, net of effects of acquisition: Receivables (8,433) (10,491) 2,203 Inventories (10,533) (7,761) 8,251 Prepaids (998) 215 974 Accounts payable 6,011 982 2,086 Accrued payroll 41 222 2,388 Accrued warranty 74 (1,437) 1,808 Taxes payable 733 (2,353) 1,614 Accrued liabilities 4,459 (838) (1,749) Other 516 725 (2,232) -------- -------- -------- Net Cash from Operating Activities 18,195 3,635 36,556 Investing Activities Property, plant and equipment purchases (13,256) (8,588) (4,029) Proceeds from equipment sales 511 178 658 Acquisitions (8,954) (5,553) Purchases of short-term investments (87,548) (81,470) Proceeds from sale of short-term investments 21,131 5,221 6,900 Proceeds from maturities of short-term investments 9,407 82,779 43,824 -------- -------- -------- Net Cash from (used in) Investing Activities 17,793 (16,912) (39,670) Financing Activities Increases in long-term debt and line of credit 17,500 Payments on long-term debt and line of credit (27,500) (2,055) Deferred issue costs (189) Proceeds from issuance of Common Stock 1,540 1,169 997 Common Stock repurchased (29,559) (1,659) -------- -------- -------- Net Cash (used in) Financing Activities (38,019) (490) (1,247) Net (decrease) in cash and cash equivalents (2,031) (13,767) (4,361) Cash and cash equivalents at beginning of year 8,793 22,560 26,921 -------- -------- -------- Cash and cash equivalents at end of year $ 6,762 $ 8,793 $ 22,560 ======== ======== ======== See notes to consolidated financial statements.
30 VARCO INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business -- Varco International, Inc. and its subsidiaries (hereinafter, the "Company") are engaged in the design, manufacture, sale and rental of tools, equipment and instrumentation used primarily in the worldwide oil and gas well drilling equipment segment of the oil field service industry. The Company operates through five divisions: Varco Drilling Systems, whose products include integrated systems for rotating and handling pipe on a drilling rig; Varco BJ Oil Tools, whose products include pipe handling tools, hoisting equipment and rotary equipment; Martin-Decker/TOTCO Instrumentation, whose instrumentation products are used in the management of drilling operations; Shaffer, whose products include pressure control and motion compensation equipment and flow devices; and Thule Rigtech whose products are used in the handling, mixing, transport and conditioning of drilling fluids. Principles of Consolidation -- The consolidated financial statements include the accounts of Varco International, Inc. and its wholly-owned subsidiaries. All material intercompany items and transactions have been eliminated in consolidation. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual amounts could differ from those estimates. Cash and Cash Equivalents -- The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Short-term Investments -- The Company adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"("Statement 115") for investments held as of or acquired after January 1, 1994. In accordance with Statement 115, prior period financial statements have not been restated to reflect the change in accounting principle. There was no cumulative effect of adopting Statement 115. Under Statement 115, management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities that the Company has both the positive intent and ability to hold to maturity are carried at amortized cost. Debt securities that the Company does not have the positive intent and ability to hold to maturity and all marketable equity securities are classified as available-for-sale and carried at fair value. Unrealized holding gains and losses, net of tax, on securities classified as available-for-sale are carried as a separate component of shareholders' equity. The Company classifies its short-term investments as available-for-sale securities and carries them at their fair value. In 1994 short-term investments consisted of government and debt securities with interest rates ranging from 3% to 9%. The Company had no such investments at December 31, 1995. Concentrations of Credit Risk -- Substantially all of the Company's accounts receivable are due from customers in the oil and gas industry, both in the United States and internationally. The Company performs periodic credit evaluations of its customers and generally does not require collateral. In certain circumstances, the Company requires letters of credit to further ensure credit worthiness. Inventories -- Inventories are stated at the lower of cost or market. The Company determines the cost of inventories using the last-in, first-out ("LIFO") method. Depreciation -- Depreciation is provided using the straight-line method over estimated useful lives ranging from 3 to 25 years. VARCO INTERNATIONAL, INC. AND SUBSIDIARIES 31 Intangible Assets -- The excess of cost over net assets of businesses acquired ("goodwill") is being amortized on a straight-line basis over periods ranging from 10 to 40 years. The carrying value of goodwill will be reviewed if the facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company's carrying value of the goodwill will be reduced by the estimated shortfall of cash flows. Included in Other Assets are other intangible assets totaling $4,594,000 net of accumulated amortization of $4,423,000 at December 31, 1995, which are being amortized on a straight-line basis over estimated useful lives ranging from 5 to 17 years. Income Taxes -- The Company follows the provisions of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("Statement 109"). Under Statement 109, the liability method is used to account for income taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized. The provision for income taxes is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Impairment of Long-Lived Assets -- In the second quarter of 1995 the Company adopted FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets to be Disposed of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. Prior years' financial statements have not been restated and there was no cumulative effect of adopting Statement 121. Excess equipment and a production facility held for sale are stated at their estimated net realizable value. Revenue Recognition -- The Company recognizes revenue upon shipment of product, upon the use of rented equipment and upon the completed contract method for installation work. Fair Value of Financial Instruments -- The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable and accounts payable approximated fair value as of December 31, 1995 and 1994 because of the relatively short maturity of these instruments. The carrying value of debt approximated fair value as of December 31, 1995 and 1994, based upon quoted market prices for similar debt issues. Foreign Currency -- The Company has determined that the United States dollar is the functional currency of all its foreign subsidiaries except for Rig Technology Limited whose functional currency is the British pound sterling. Accordingly, the financial statements of most foreign operations are remeasured in terms of the United States dollar and exchange gains and losses are recognized in operations. Exchange losses were $673,000, $68,000, and $264,000 in 1995, 1994 and 1993 respectively. Financial statements of Rig Technology Limited are translated at current rates of exchange, with gains or losses resulting from translation included as a separate component of shareholders' equity. Stock Based Compensation -- The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for the stock option grants. Per Share Data -- Per share amounts are computed by dividing net income by the weighted average number of common shares and dilutive common share equivalents which were 31,729,423, 33,522,209, and 33,399,956 in 1995, 1994 and 1993, respectively. Reclassification -- Certain amounts in the 1994 and 1993 financial statements have been reclassified to conform with current year classification. 32 VARCO INTERNATIONAL, INC. AND SUBSIDIARIES B SHORT-TERM INVESTMENTS At December 31, 1995 the Company had no short-term investments. At December 31, 1994 available-for-sale securities were as follows:
Available-for-sale securities --------------------------------------------- Gross Gross Unrealized Unrealized Estimated (in thousands) Cost Gains Losses Fair Value - --------------------------------------------------- ---------- ---------- ---------- U.S. Treasury notes and obligations of U.S. government agencies $ 14,451 $ 9 $ 290 $14,170 Obligations of states and political subdivisions 10,812 102 10,710 Corporate debt securities 5,031 79 4,952 --------- ---- ------- ------- $ 30,294 $ 9 $ 471 $29,832 ========= ==== ======= =======
For the years ended December 31, 1995 and 1994, gross realized gains on sales of available-for-sale securities totaled $18,000 and $7,000 respectively, and gross realized losses totaled $240,000 and $153,000 respectively. C INVENTORIES Inventories classified as current assets consist of the following:
December 31, (in thousands) 1995 1994 --------------------------------------- -------- Raw materials $ 5,480 $ 6,164 Work in process 18,061 13,677 Finished goods 61,052 54,879 LIFO reserves (13,761) (14,421) -------- -------- $ 70,832 $ 60,299 ======== ========
In 1995, 1994 and 1993 LIFO layers of preceding years were reduced which decreased cost of goods sold by $359,000, $246,000 and $590,000, respectively. A portion of the Company's inventory is not expected to be sold or used within one year and, accordingly has been reclassified as other assets. The amount of inventory estimated to exceed one year's usage was $3,500,000 at December 31, 1995 and 1994. D PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
December 31, (in thousands) 1995 1994 ------------------------------------------------------------ ------- Land $ 2,434 $ 1,929 Building and improvements 22,616 19,242 Machinery and equipment 56,113 52,679 Rental equipment 17,611 15,615 Furniture and fixtures 11,671 9,814 Autos and trucks 802 713 -------- ------- 111,247 99,992 Less accumulated depreciation and amortization 60,625 52,333 -------- ------- $ 50,622 $47,659 ======== =======
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES 33 E INCOME TAXES Significant components of the Company's deferred tax liabilities and assets are as follows :
December 31, (in thousands) 1995 1994 - ----------------------------------------------------------------------------------------- ------- Deferred tax liabilities: Tax over book depreciation $ 4,036 $ 3,910 Deferred tax assets: Intercompany profit elimination 3,275 3,530 Postretirement benefit obligation 1,976 1,698 Allowance for loss on sale of assets 1,769 1,663 Allowance for excess inventory 1,667 1,778 Foreign net operating loss carryforward 2,100 Allowance for warranty cost 715 330 Accruals 862 515 Other 444 414 ------- ------- Total deferred tax assets 12,808 9,928 Valuation allowance for deferred tax assets (3,206) (2,254) ------- ------- Net deferred tax assets 9,602 7,674 ------- ------- Net deferred taxes 5,566 3,764 ======= ======= Current deferred tax assets $ 5,130 $ 5,068 Noncurrent deferred tax assets (liabilities) 436 (1,304) ------- ------- Net deferred taxes $ 5,566 $ 3,764 ======= =======
United States and foreign income (loss) before income taxes and the components of income tax expense are as follows:
(in thousands) 1995 1994 1993 -------------------------------------------------- ------- ------- Income (loss) before income taxes: U.S. $23,260 $17,376 $12,104 Foreign (1,352) 1,541 (1,293) ------- ------- ------- $21,908 $18,917 $10,811 ======= ======= =======
Income tax expense (benefit):
(in thousands) 1995 1994 1993 --------------------------------------------------------- ------- ------- Current: U.S. $ 8,450 $ 7,042 $ 4,894 Foreign 881 660 441 State 545 559 429 Utilization of credits (899) (1,258) (1,680) Tax benefits credited to paid-in capital 294 270 149 ------- ------ ------- 9,271 7,273 4,233 Deferred: U.S. (655) (517) (518) Foreign (1,147) ------- ------- ------- $ 7,469 $ 6,756 $ 3,715 ======= ======= =======
34 VARCO INTERNATIONAL, INC. AND SUBSIDIARIES Differences between the Company's income tax expense and an amount calculated utilizing the federal statutory rate are as follows:
(in thousands) 1995 1994 1993 - -------------------------------------------------------------------- -------- ------- At federal statutory rate $ 7,668 $ 6,621 $ 3,684 Increases (reductions) in taxes: FSC benefit (973) (767) (536) Financial statement benefit from credit carryovers (418) (1,278) Tax impact of non-deductible expenses 797 605 421 State taxes, net of federal benefit 354 363 283 Tax rate differential on foreign earnings and losses recorded without tax benefit 206 120 881 Other (165) (186) 260 -------- -------- ------- Total tax provision $ 7,469 $ 6,756 $ 3,715 ======== ======== =======
The Company has net operating losses available for Netherlands tax purposes of approximately $6,000,000. These net operating losses can be carried forward for an indefinite period of time. Income taxes paid net of refunds received in 1995, 1994 and 1993 were $7,007,000, $8,957,000 and $2,318,000, respectively. The Company is currently under examination by the Internal Revenue Service for the years ended December 31, 1992, 1991 and 1990. Management believes the resolution of this examination will not have a material adverse effect on the Company's financial position. F LONG-TERM DEBT Long-term debt consists of notes payable to institutional investors under an 8.95% Senior Note Agreement (the "Note Agreement.") Principal is due in five equal annual installments which commenced June 30, 1995 and interest is payable semiannually. The Note Agreement contains restrictive covenants requiring the maintenance of certain financial ratios, limitations on additional borrowings and capital expenditures, and restrictions on distribution of cash or other property. The Company has an unsecured revolving credit and term loan agreement with two Citicorp affiliates which provides for advances up to $25,000,000 and letters of credit up to $10,000,000, subject to reduction in certain events. Advances under the loan agreement bear interest at either a prime rate plus 1/2% or a rate based on the Eurodollar Market. The agreement requires a commitment fee of .375% of the unused portion of the credit facility, restricts additional borrowings if minimum asset levels are not met and contains restrictive covenants requiring the maintenance of certain financial ratios, limitations on additional borrowings and capital expenditures, and restrictions on distribution of cash or other property. The agreement terminates in October 1998. There were no borrowings under the agreement at December 31, 1995. Required principal payments on long-term debt as of December 31, 1995, are as follows:
(in thousands) -------------------------------------------------------- 1996 $ 10,000 1997 10,000 1998 10,000 1999 9,539 --------- $ 39,539 =========
Interest paid during 1995, 1994 and 1993 was $2,504,000, $4,766,000 and $4,757,000, respectively. VARCO INTERNATIONAL, INC. AND SUBSIDIARIES 35 G SHAREHOLDERS' EQUITY The Company has an employee stock purchase plan under which 2,000,000 shares of Common Stock may be sold at a price equal to 85% of the lower of market price at the beginning or end of a six month plan period. As of December 31, 1995, 1,027,852 shares have been sold under this plan. The Varco International, Inc. Stock Bonus Plan (the "Bonus Plan") authorizes the Compensation Committee of the Board of Directors to award additional compensation to selected key employees of the Company in the form of stock awards payable in shares of Common Stock of the Company to a maximum of 1,000,000 shares. Through December 31, 1995, 329,545 shares have been granted and issued to key employees under the Bonus Plan. The Varco International, Inc. 1990 Stock Option Plan permits and predecessor plans permitted, the grant of incentive and non-statutory options to key employees and officers. Options granted under the plans must be not less than the fair market value of the stock on the date of grant. Options are exercisable during such periods as determined by the Compensation Committee and expire not later than ten years from the date of the grant. The Varco International, Inc. 1994 Directors' Stock Option Plan provides for the annual grant of a 5,000 share stock option to each non-employee director. Options granted under this plan are at fair market value of the stock on the date of grant. Options are exercisable for ten years from the date of the grant unless sooner terminated. Stock option activity during 1995, 1994 and 1993 was as follows:
Number of Shares 1995 1994 1993 - ---------------------------------------------------------------- --------- --------- Stock options outstanding, beginning of year 1,108,622 1,062,732 995,532 Activity during the year (prices per share): Granted: 330,157 255,750 218,050 1995, $6.375 to $10.75 1994, $6.3125 to $6.69 1993, $4.563 Exercised: 170,310 194,960 144,400 1995, $3.25 to $9.25 1994, $3.0625 to $6.25 1993, $3.0625 to $4.69 Canceled: 3,800 14,900 6,450 1995, $4.563 to $9.25 1994, $4.563 to $6.69 1993, $3.0625 to $4.69 --------- --------- --------- Stock options outstanding, end of year 1,264,669 1,108,622 1,062,732 1995, $3.25 to $10.75 1994, $3.25 to $9.25 1993, $3.0625 to $9.25 --------- --------- --------- Stock options exercisable 606,952 590,132 640,162 ========= ========= ========= Stock options available for future grant 590,243 916,600 577,500 ========= ========= =========
At December 31, 1995, 3,477,272 shares of Common Stock were reserved for future issuance in connection with stock purchase, stock bonus and stock option plans. On March 24, 1995, the Company commenced a "Dutch Auction" type tender offer (the "Tender Offer") to purchase up to 5,300,000 shares of its Common Stock. Pursuant to the Tender Offer, which terminated on April 21, 1995, the Company purchased 3,150,560 shares of its Common Stock at a purchase price of $8.00 per share. The aggregate cost to the Company of the Tender Offer, including expenses, was approximately $26.2 million. In addition, the Board of Directors has authorized a stock repurchase program allowing the repurchase of up to 1,500,000 shares of the Company's Common Stock for an aggregate purchase price not exceeding $11,000,000. 36 VARCO INTERNATIONAL, INC. AND SUBSIDIARIES Repurchases under this program must be made by December 31, 1996. At December 31, 1995 the Company had repurchased on the open market 627,600 shares of its Common Stock at an average price of approximately $8.00 per share. H COMMITMENTS AND CONTINGENCIES The Company leases land and its executive offices in Orange, California under two operating leases, from certain officers, directors, and shareholders of the Company. The land lease expires in 2012, has an annual aggregate rental of $480,000 (subject to upward adjustment in 2002 based on appraisals) plus real estate taxes and other expenses. The Company has the option to purchase the leased land at a price equal to the greater of the original cost of the property to the lessors or the fair market value at the time of purchase. The office lease expires in 2005 and has an aggregate annual rental of $351,000 (subject to periodic upward adjustments based upon the consumer price index.) The Company has an option to extend this lease for 60 months based on the then fair market rent of the building. The Company leases most of its sales, service and distribution facilities under agreements ranging from one to eight years. Approximate minimum annual rental payments under noncancelable operating leases as of December 31, 1995 are as follows:
Real (in thousands) Estate Equipment Total ---------------------------------------- --------- -------- 1996 1,593 1,926 3,519 1997 1,217 1,402 2,619 1998 1,092 770 1,862 1999 1,070 368 1,438 2000 922 120 1,042 Thereafter 8,555 8,555 -------- ------- -------- $ 14,449 $ 4,586 $ 19,035 ======== ======= ========
Rent expense amounted to $4,641,000, $4,428,000, and $4,045,000 for 1995, 1994, and 1993, respectively. The Company is obligated to make royalty payments to Baker Hughes, a shareholder of the Company, each year for which sales of certain products ("royalty products") exceed $40,000,000. Royalty payments are required until the earlier of such time as the discounted value (discount rate 12.5%) of all such payments equals $15,000,000 or September 29, 1996. The royalty rate ranges from 2% to 4 1/2% as the annual royalty product sales increase from $40,000,000 to in excess of $90,000,000. The Company's royalty payment obligations can be accelerated in certain circumstances, including a change in control of the Company. Royalty expense attributable to Baker Hughes amounted to $895,000, $1,763,000, and $33,000, in 1995, 1994, and 1993, respectively. At December 31, 1995 the Company was obligated under outstanding letters of credit in the face amount of approximately $3,753,000. The Company is sometimes named as a defendant in litigation relating to the products and services it provides. The Company insures against these risks to the extent deemed prudent by its management, but no assurance can be given that the nature and amount of such insurance will in every case fully indemnify the Company against liabilities arising out of pending and future legal proceedings relating to its ordinary business activities. The Company provides for costs related to these contingencies when a loss is probable. It is the opinion of management that it is remote that there will be an unfavorable resolution in excess of amounts previously provided. The Company has been designated as a potentially responsible party ("PRP") for two separate waste disposal sites. With respect to both of the sites, numerous other PRPs have similarly been designated. In one case the Company has a contribution agreement with other PRPs, and settlements and costs paid by the Company have VARCO INTERNATIONAL, INC. AND SUBSIDIARIES 37 not been significant. In the opinion of the Company's management neither these or other environmental matters would have a material adverse effect on the consolidated financial position of the Company. I BENEFIT PLANS The Company has a contributory profit sharing plan covering eligible U.S. employees and certain foreign employees with more than one year's service. Under the plan, the Company contributes from 2% to 20% of its net income (as defined) at the discretion of the Board of Directors. The total contribution may not exceed the maximum amount allowable for income tax purposes. Contributions to the Plan amounted to $1,450,000, $1,200,000, and $850,000, for 1995, 1994 and 1993, respectively. In 1993, the Company amended its Profit Sharing Plan to designate a portion of profit sharing contributions for retiree healthcare and life insurance benefits for certain eligible employees retiring after December 31, 1993. In 1995 the Plan was amended to include an employer matching contribution. The Company's matching contribution amounted to $280,000 in 1995. The Company also has a supplemental defined benefits plan providing retirement and death benefits for a number of key employees. The plan is unfunded and the net pension liability was $1,719,000 and $1,382,000 at December 31, 1995 and 1994, respectively. Expense under the plan was $300,000, $300,000, and $248,000 in 1995, 1994, and 1993, respectively. For certain former employees who retired prior to December 31, 1993, healthcare and life insurance benefits are provided through insurance companies. In 1993 the Company adopted FASB Statement No. 106, Accounting for Postretirement Benefits Other Than Pensions. The transition obligation is being amortized over 20 years. The following table presents the funded status of the defined benefit health care and life insurance plan, reconciled with amounts recognized in the Company's balance sheet:
December 31, (in thousands) 1995 1994 - ----------------------------------------------------------------- -------- Accumulated postretirement benefit obligations $(12,236) $(13,124) Unrecognized net gain (6,369) (5,376) Unrecognized transition obligation 12,958 13,721 -------- -------- $ (5,647) (4,779) ======== ======== Net periodic postretirement benefit cost includes the following components: Interest cost $ 1,011 $ 1,115 Amortization of transition obligation 763 763 Amortization of (gain) (293) -------- -------- $ 1,481 $ 1,878 ======== ========
The assumed weighted-average annual rate of increase in the per capita cost of covered benefits is 9% for 1996 and is assumed to decrease gradually to 5.5% for 2010 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1995 by $1,196,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1995 by $104,000. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.25% and 8% at December 31, 1995 and 1994, respectively. The Company has an Executive Management Savings Plan and a Directors Saving Plan (the Plans) which permit eligible executives and the Company's non-employee directors to defer a portion of their compensation. Participants in the Plans may also participate in the Company's "split-dollar" life insurance program pursuant to 38 VARCO INTERNATIONAL, INC. AND SUBSIDIARIES which the Company will purchase a life insurance policy for a premium equal to the amounts deferred plus any additional amount required to provide a minimum death benefit. Amounts payable to a participant under the Plans are offset by any benefits paid under the participant's life insurance policy. The life insurance policies are intended to provide security for the payment of benefits under the Plans. The cost associated with the plans for 1995 was $138,340. J SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per share data) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter - --------------------------------------------------------- ----------- ----------- ----------- 1995 Revenues $57,645 $76,787 $68,053 $71,246 Gross profit 23,787 28,017 24,780 22,630 Income before income taxes 4,721 8,289 5,457 3,441 Provision for income taxes 1,808 2,886 1,776 999 Net income 2,913 5,403 3,681 2,442 Net income per share of common stock .09 .17 .12 .08 1994 Revenues $51,314 $57,519 $54,248 $60,520 Gross profit 20,266 21,440 21,802 23,253 Income before income taxes 3,650 4,616 4,864 5,787 Provision for income taxes 1,292 1,712 1,856 1,896 Net income 2,358 2,904 3,008 3,891 Net income per share of common stock .07 .09 .09 .11
K GEOGRAPHIC INFORMATION Information about the Company's worldwide operations for 1995, 1994 and 1993 follows:
Adjustments & (in thousands) United States Europe Asia Eliminations Consolidated --------------------------------------------- --------- --------- ------------- ------------ 1995 Sales and rentals to unaffiliated customers $ 194,941 $ 57,081 $ 20,329 $ 272,351 Intercompany sales 33,974 19,684 1,000 (54,658) Total sales and rentals 228,915 76,765 21,329 (54,658) 272,351 Operating profit 15,174 5,248 1,486 21,908 Identifiable assets 181,027 53,326 12,444 246,797 1994 Sales and rentals to unaffiliated customers $ 159,812 $ 39,189 $ 22,442 $ 221,443 Intercompany sales 34,257 15,484 1,085 (50,826) Total sales and rentals 194,069 54,673 23,527 (50,826) 221,443 Operating profit 12,521 4,037 2,359 18,917 Identifiable assets 191,273 49,924 16,444 257,641 1993 Sales and rentals to unaffiliated customers $ 140,046 $ 35,890 $ 15,831 $ 191,767 Intercompany sales 29,756 10,819 453 (41,028) Total sales and rentals 169,802 46,709 16,284 (41,028) 191,767 Operating profit 5,418 4,176 1,217 10,811 Identifiable assets 195,185 40,750 12,086 248,021
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES 39 Intercompany sales are transferred at prices that approximate those charges to third party distributors. International sales from all of the Company's operating locations are principally to the following geographic areas:
(in thousands) 1995 1994 1993 -------------------------------------------------- --------- --------- Europe $ 83,496 $ 49,783 $ 50,735 Asia and Australia 45,480 38,761 33,774 Africa and Middle East 21,217 18,544 13,402 South America 22,797 25,515 15,663 Canada 8,539 7,401 14,861 Mexico 1,125 3,438 1,748 Former Soviet Union 6,359 6,376 6,320 Miscellaneous 174 276 240 --------- --------- --------- $ 189,187 $ 150,094 $ 136,743 ========= ========= =========
No individual customer accounted for more than 10% of total sales in 1995, 1994 or 1993. L ACQUISITIONS On November 30, 1994 the Company acquired all of the outstanding shares of Rig Technology Limited ("Thule Rigtech"), a company incorporated in Scotland, for approximately $8,954,000 consisting of cash, the assumption of Thule Rigtech's debt and the payment of certain expenses. Thule Rigtech provides equipment and systems used in the handling, mixing, transport and conditioning of drilling fluids. On August 19, 1993 the Company acquired all the outstanding common stock of Metrox, Inc. for a cash consideration of approximately $4,000,000. Metrox designed and manufactured instrumentation used in the oil and gas industry, as well as in general commercial and industrial applications. Metrox has been combined with, and is reported within, the Company's Martin-Decker/TOTCO Instrumentation Division. The acquisitions were accounted for as purchases and, accordingly, the acquired assets and liabilities were recorded at their estimated fair values at the dates of acquisition and operating results are included in the consolidated statements of income from the respective dates of acquisition. Supplemental unaudited information is not presented for Rig Technology Limited or Metrox because it would not have a material impact on previously reported results. 40 VARCO INTERNATIONAL, INC. AND SUBSIDIARIES EX-21 14 SUBSIDIARIES OF VARCO INTERNATIONAL, INC. EXHIBIT 21 SUBSIDIARIES OF VARCO INTERNATIONAL, INC. ALL 100% OWNED
JURISDICTION OF INCORPORATION ADDRESS -------------- ------- Best Industries, Inc. Texas 12950 West Little York Houston. Texas 77041 -------------------- Varco de Mexico California 743 No. Eckhoff Street Holdings, Inc. Orange. California 92668 ------------------------ Martin-Decker TOTCO, Inc. Texas 1200 Cypress Creek Road Cedar Park, Texas 78613 ----------------------- Metfox, Inc. California 743 No. Eckhoff Street Orange. California 92668 ------------------------ Varco Shaffer, Inc. Texas 12950 W. Little York Houston. Texas 77041 -------------------- Varco International Inc Singapore No. 8 Sixth Lok Yang Road Pte Ltd Jurong Singapore 2262 -------------- Varco BJ 0il Tools B.V. The Netherlands Nijverheidsweg 45 4879 AP Etten-Leur P.O. Box 17, 4870 AA Etten-Leur The Netherlands --------------- Varco (U.K.) Limited United Kingdom Forties Road, Montrose Angus. Scotland --------------- Varco BJ FSC Inc. Barbados 743 No. Eckhoff Street Orange, California 92668 ------------------------ 304774 Alberta Ltd. Alberta, Canada Bay 15 - 2916 5th Ave. N.E. Calgary, Alberta T2A 6M7 Canada ------ Rig Technology Limited United Kingdom South College Street Aberdeen, Scotland ------------------
EXHIBIT 21 PAGE 2 OF 2
JURISDICTION OF INACTIVE SUBSIDIARIES INCORPORATION ADDRESS - --------------------- --------------- ------- Varco Marine Tools Texas 12950 West Little York International, Inc. Houston, Texas 77041 -------------------- Varco-Disc California 743 No. Eckhoff Street Orange, California 92668 ------------------------ Best Disc Texas 12950 West Little York Houston, Texas 77041 ---------------------- Varco Eastern, Inc. California 743 NO. Eckhoff Street Orange, California 92668 ------------------------ Varco International Netherlands P.O. Box 507 Finance N.V. Antilles Curacao ------- Varco Singapore, Ltd. California 743 No. Eckhoff Street Orange, California 92668 ------------------------ Varco Middle East California 743 No. Eckhoff Street Orange, California 92668 ------------------------ Varco Electronics, Inc. California 743 No. Eckhoff Street Orange, California 92668 ------------------------ Varco Electronics Disc California 743 No. Eckhoff Street Orange, California 92668 ------------------------
EX-23 15 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statements Number 2-66830, 2-96290, 33-36841, 33-62118, 33-61861 and 33-61939 on Form S-8 of Varco International, Inc. and in the related Prospectuses of our report dated February 15, 1996, with respect to the consolidated financial statements and schedule of Varco International, Inc. included in the annual report on Form 10-K for the year ended December 31, 1995. Orange County, California February 15, 1996 EX-27 16 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF THE REGISTRANT INCLUDED IN ITS ANNUAL REORT TO SHAREHOLDERS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1995 DEC-31-1995 6,762,000 0 62,268,000 (1,585,000) 70,832,000 146,940,000 111,247,000 (60,625,000) 246,571,000 57,753,000 29,539,000 124,552,000 0 0 26,627,000 246,571,000 272,351,000 273,731,000 173,137,000 234,151,000 13,156,000 0 4,516,000 21,908,000 7,469,000 0 0 0 0 14,439,000 0.46 0
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